Managing Cash Flow

276 Planning Cash Flow
• Pinpointing the need for and timing of important cash payments such as
payroll, suppliers, debt service, taxes, dividends, and so on
• Showing in advance the need for outside funding, thus providing the
opportunity for more effective negotiations
• Recognizing when and how much excess cash will be available to allow
for more effective short-term investing
• Identifying the need for additional long-term funding (e.g., for capital
improvements) and ability to repay
• Providing definitive information as to the amount of cash needed, when
needed, why needed, and for how long
• Indicating when operations can be expanded or should be contracted
based on the availability of cash resources or lack thereof
AVOID SURPRISES—PLAN CASH FLOW.
MANAGING CASH BALANCES
Even when all the planning, forecasting, budgeting, and related activities have
been accomplished, there is another element of the puzzle which has to be
handled—determining how much cash on hand is enough. The company will
require some minimum balance of cash on hand at all times just to be able to get
through the next batch of bills to be paid—whether they be payroll, vendor payments,
taxes, borrowing obligations, or all the above. The person responsible for
cash management must also be ready to deal with the existence of an excess
amount of cash or a cash shortfall. How can company management make these
determinations?
Determining Minimum Levels of Cash Reserves
Just how much cash is enough? This is an important factor to consider in cash
planning since the amount of cash required to be left in the coffers to handle working
needs must be decided. Keeping too much cash around wastes a valuable
resource and reduces the amount of return that can be generated on corporate
assets. Too little cash means that certain bills will not be paid on time, and the
implication of this can range from annoying through irritating all the way to devastating,
depending on exactly what or who does not get paid. How much cash
then should be kept on hand?
Basically, the company’s cash reserves must be sufficient to meet daily cash
expenditure needs. To that minimum level of cash, the company should add a
safety cushion to allow for any unforeseen needs or opportunities that may from
time to time arise. The company should calculate its average daily (or weekly)
cash expenditures over a number of recent periods (probably a year). Then, based