Best Practices for Cash Management

10 Tips for Effective Cash Management

Understanding and managing cash is essential to running a business. Cash is at the center of every decision, from paying bills to meeting payroll. Effective cash management also ensures a business can invest in new projects, expand operations, and prepare for unexpected expenses or downturns. It ensures timely credit management, which helps to maintain good relationships with lenders and suppliers. In essence, managing cash flow effectively keeps a business financially healthy, agile, and ready for any challenge or opportunity on the horizon.

Still, many organizations struggle with managing cash effectively, which may result in cash shortages—even for businesses that appear profitable on paper. Often, the root cause is simply a failure to reconcile cash transactions as frequently as they should and a lack of understanding when it comes to the timing of cash receipts and disbursements or critical capital expenditures. Businesses might also struggle when system integrations affect cash management, such as syncing of banking transactions, credit card transactions, sales and accounts receivable collections, and most importantly disbursements within AP software. Other challenges might involve controls around vendor setup, check register approval, and transaction clearance automation within Enterprise Resource Planning (ERP) systems to match bank feeds. Though it may seem basic, strong internal controls around bank reconciliations and cash management are crucial.

Maintaining liquidity to cover immediate obligations, planning and forecasting future cash flow, and reducing the need for borrowing to avoid high-interest loans are crucial aspects of effective cash management. By following a few best practices, you can improve cash management and ensure your organization can cover daily expenses, invest in opportunities, and comfortably handle emergencies.

Cash Management Best Practices

• Implement strong internal controls and conduct frequent reconciliations. Perform frequent reconciliations of bank statement balances, which should be reconciled monthly to maintain accurate records and to catch discrepancies early. Implement strong internal controls within the cash and payable processes and ensure that only specific individuals are authorized to approve cash disbursement transactions.
• Ensure cash transactions are coded frequently. Frequent transaction coding throughout the reporting period ensures accuracy, streamlines reconciliation, aids in financial planning, and reinforces internal controls. Conduct this bi-weekly for accounts with large transaction volume and bi-monthly for those with minimal transactions.
• Monitor cash flow. Track accounts receivable in detail including payment terms and past collection history. Whenever possible, collect as much cash upfront for revenue contracts.
• Prepare a budget. Be mindful of the importance in preparing an annual budget for projected revenues and expenses and regularly compare budget to actual results. Ensure stakeholders have insight into significant capital expenditures, which should ideally be maintained in your annual budget.
• Monitor and forecast on a rolling basis. It is essential that organizations prepare a rolling cash flow forecast and update cash inputs on a weekly basis. A 13-week cash forecast is the most popular time horizon as it allows companies to maintain accuracy with upcoming predicted transactions while also offering a view into the future to predict medium-term planning. This helps to anticipate cash shortages and surpluses.
• Manage costs carefully. Have insight into fixed and variable costs and scrutinize variable costs that are not necessary during periods of cash uncertainty. Also helpful is insight into the timing of certain fixed costs with annual renewal periods, such as insurance and software costs.
• Ensure system integration. Make sure your ERP system is properly synced with bank feeds and AP software. Regularly update and monitor these systems to avoid discrepancies.
• Automate where possible. Use automation to streamline transaction processes and reduce manual errors.
• Ensure oversight and monitoring. Dedicate a team or individual to oversee cash management processes and ensure controls are consistently applied.
• Compare transactions to vendor balances. Comparing cash transactions to vendor balances within accounts payable ensures accuracy, detects discrepancies, and prevents duplicate payments, thereby enhancing overall cash management.

How We Help

AAFCPAs’ Outsourced Accounting & Fractional CFO practice provides right-sized, outsourced accounting and advisory support that spans basic bookkeeping and compliance through advanced CFO advisory, analysis, and management reporting. As part of this, we offer financial oversight and strategic guidance to track income and expenses accurately, identify trends and potential issues, enable more timely and accurate forecasting and budgeting, and optimize working capital. AAFCPAs Business Process & IT Consulting practice further assists clients with business process assessments, systems synchronization, new system implementations, and automation within your existing processes and systems.

If you have questions, please contact Destiny J. Flood, CPA, Partner, Outsourced Accounting & Fractional CFO at 774.512.4151 or dflood@aafcpa.com—or your AAFCPAs Partner.