Wednesday October 5, 2011 16:17

Cash Management 101

Posted by Steve Drago as Accounts Receivable, Cash Management, Inventory

Whether you are a Fortune 100 company or a single person company, cash flow management is of prime importance to your business’s survival.  You can have the best idea,  product or service but if you run out of cash, bad things happen.

Cash flow management is about managing cash, invoices, receivables, inventory and payables.  Let’s talk briefly about each of these.


Many small businesses do not perform a cash flow forecast regularly. They do it when a cash flow crisis is imminent which is sometimes too late. Cash flow forecasts provide you the visibility you need to avoid problems by addressing potential problems early. I suggest doing this at a minimum monthly for all businesses and more frequently if your cash balance is very low and/or if you have few alternatives to securing more cash. This will allow you more time to address improving your cash position.

Sales Invoices:

  1. Receive sales orders by your website, email, US mail, fax and phone. At the time of the order secure the email address of the customer’s accounts payable person and the phone number of an accounts payable person. Talk to this person as soon as possible and understand how and when they will process your invoice. Know who is responsible for approving your invoice for payment.
  2. For consumer sales orders, secure a credit card number at the time of the order.  Manufacturers can pay invoices by credit card or debit card.
  3. Fulfill the sales order as soon as possible.  You may want to make sure the credit card payment transaction is valid before you ship your product. You will need to set up controls to prevent a shipment before  the credit card transaction is confirmed as valid.
  4. Charge the credit card immediately if available.
  5. Send out sales invoices as soon as possible by email or to the customer’s invoicing web site.  Send the invoice to a specific person if possible who can pay the invoice or approve the invoice.
  6. Indicate on the sales invoice when the invoice is due and exactly where the payment is to be sent.
  7. Include the customer’s Purchase Order number on the invoice, if available.
  8. Accept payment by checks, credit card payments, debit card payments, wire transfer payments and ACH payments.
  9. Offer your express mail account number for express mail for large checks to be sent to you.
  10. Consider using a lockbox for the receipt of checks.
  11. Retrieve your postal mail daily and promptly.


  1. Deposit checks on the day checks are received. You will gain a day of float.
  2. Consider daily remote bank deposits from your office.
  3. Enter the payment receipt in your accounting system immediately.
  4. Follow up immediately with the customer for short-payments or chargebacks.
  5. Follow up internally for product or service issues when a customer does not pay in full on time.  Keep following up until this is resolved.
  6. Follow up with the customer immediately if a check is rejected due to insufficient funds. Request a replacement check or better yet request a bank Cashier’s Check.

Accounts Receivable Policy:

  1. Check a customer’s references before granting credit.
  2. Establish a customer’s credit limit and adhere to it.
  3. Offer a discount for early payment.
  4. Charge late fees.
  5. Make contact with the accounts payable person of new accounts before the first invoice is due. Ensure your sales invoice is on track to be paid on time by developing a relationship with this person.
  6. Document a process of following up on collections. When payment is not received on time and/or when promised, follow up immediately.  Keep good collection notes.
  7. Don’t be reluctant to hold goods or services if payments are late.
  8. Engage your salesperson, if needed, to accelerate payment or resolve any issues.
  9. Ensure one of your employees is responsible for managing accounts receivable and the DSO (Days Sales Outstanding). Measure DSO every month and report it to management.
  10. Charge state sales tax if required.  Secure a sales tax exemption certificate from the customer to avoid the collection of sales tax.


  1. Pay the invoice on the last day due, preferably a Friday so you gain more float time.
  2. Ensure the invoice unit price does not exceed the purchase order unit price.
  3. Ensure the quantity delivered does not exceed the quantity you ordered.
  4. Have a policy on what your payables person should do if the delivered quantity exceeds the ordered amount or is under the order amount.
  5. Use business credit cards for travel, lodging, and meals.  However make sure you have control over the spending and reporting of the credit cards. Employees will abuse the use of the credit cards and you need to constantly monitor and enforce your policy.
  6. Secure discounts for frequently used hotels, airlines and car rental companies.
  7. Do not issue travel advances to employees.
  8. Ensure your payable invoice is approved by your management and documented before processing the invoice into the general ledger.
  9. Ensure one of your employees is responsible for managing Payable Days Outstanding.
  10. Limit the number of authorized check signers.
  11. Have a management employee approve the checks before they are put into the mail. The management employee should confirm the invoices were previously approved.
  12. Payments made via ACH should require one employee to prepare the ACH and a different employee to approve the ACH.


  1. Ensure you can accurately forecast purchases, production and sales and use this knowledge to schedule production efficiently.
  2. Update your production schedules frequently.
  3. Shop around for purchased items. Consider multiple sources of supply and let your vendors know you have another source for their product or service.
  4. Develop a policy for handling obsolete inventory. Determine if and when you should sell it, scrap it, donate it etc.
  5. Employ knowledgeable personnel responsible for production efficiencies, quality etc.  Don’t produce just because you have the time or personnel available.  If you produce it, you spend money now on utilities, you need to insure the product, you need to warehouse the product, and guard against theft.
  6. Do not accept returns unless they are pre-authorized by your company in writing.  Develop an RGA (Returned Goods Authorization) procedure for this.
  7. For returns, make the appropriate accounting entry for inventory, expense and receivables as soon as possible.
  8. Determine the reason for all returns and try to make improvements to avoid future returns.
  9. Ensure one of your employees is responsible for managing Inventory Days Outstanding.
  10. Restrict access to the warehouse to only persons who need to be there.
  11. Ensure the quantity and quality of incoming goods is verified and recorded.
  12. Dispose of inventory not needed for the discontinued products.
  13. Ensure only licensed, trained and authorized employees use the fork lift trucks.
  14. Ensure the inventory warehouse exit doors are not an easy way for inventory to walk out the door.

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