Cash Management for Business – A Best Practice – Part 1

The basic definition for cash management is the process of organizing, planning, and managing cash flows. Cash flows are represented by the inflows and outflows of cash. For business, cash management is a key to a company’s success.

For this article, our focus is on mid-term cash management. What is mid-term? A 12-week cash forecast.

Why do the best accounting departments forecast mid-term cash for their business? Before we answer this question let’s provide a little background. Organizations prepare an annual budget in monthly buckets. Many also update their budgets with rolling quarterly forecasts. These budgets and forecasts include monthly cash forecasts. Monthly cash forecasts set the annual goal and provide an estimate for the long-term cash balance. But they do not provide a guide for the day-to-day cash management of a business.  

So why do the best organizations forecast mid-term, weekly cash? Because they know a guide is needed to navigate a company on a weekly basis. They prepare a weekly cash forecast, so they understand the details of activities. Inflow details that include collection timing and new customer sales forecasts (all by named customer account). Outflow details that include accounts payable timing (by named vendor account), payroll and other expenses.

For example, what are the projections for when accounts receivable collections are to be received? What is the current forecast for new sales and collections? Are there one-time (unplanned) expenditures needed? Should payments be delayed? Which ones? Is payroll going to be different in 8 weeks (due to new hires and/or hourly wages)?

In low cash times a weekly forecast view is critical to manage cash, so a company can meet its obligations. Think about cash movement from week to week and how it can impact a business’ cash balance. And picture it. See below.