How well a business manages its cash flow is one clear indication of its effectiveness and its ability to respond to sudden changes in an industry. Without efficient cash flow management practices, a business loses its capacity to be competitive when sudden opportunities for growth arise. A business also risks a slowdown or total halt in operations if a lack of cash causes the organization to miss payment deadlines for wages, bills, or taxes.
In a recent Insurance Business America article, finance expert Michael Quinn discusses a few basic principles of properly managing cash flow in a corporate setting. He recommends the following divisions when setting a budget:
- Allocate 70 percent as working cash
Working cash is the money that your organization will need to function on a day-to-day basis. Treat the 70 percent threshold as the spending limit and try to make cuts in this allocation whenever possible.
- Set aside 10 percent as working cash reserves
Working cash reserves are used to cover large regular expenses such as payroll, taxes, utilities bills, and the like.
- Save 10 percent as reserve cash
Reserve cash will give your business a fund to draw from when opportunities for growth and expansion arise.
- Put 10 percent in an emergency fund
An emergency fund will allow your business to respond in a timely manner to cash problems that may suddenly arise.
The system described above may seem simple, but consistently adhering to it presents a relatively formidable challenge to many business owners. It is specifically for this reason that they hire accountants and consultants to create and maintain systems for managing cash flow for them.
However, there are alternatives that allow business owners to manage cash flow efficiently and effectively without having to fork out money to hire a professional. One alternative is to use computer programs specially designed for the task, such as Cash Flow Mojo® Software. This can aid in budget planning and might even be able to give advice when it notices problems in a budget.
(Source: Dealing with a cash flow crisis, Insurance Business America, January 19, 2014)