Effective cash management is one of the cornerstones in small businesses. No financial
goal can be achieved without proper cash management. Goals often overlap, but cash
management is at the center of it all. Its the fundamental building block of financial
planning. Thats why its imperative to understand your cash management situation (2006).
Various methods of short term financing can also be essential to a successful business.
Both cash management and short term financing will be discussed throughout the paper.
Managing your working capital, managing business risks, and monitoring costs and
inventory are cash management techniques to be discussed. Managing your working
capital is very essential in cash management. Your level of working capital is intimately
related to the flow of cash into and out of your business. Simply stated, you need enough
working capital to setup the business, pay operating costs, and continue to operate until
payment arrives 30, 60 or maybe even 90 days later. But if youve used a lot of that
working capital to pay for fixed assets, you may come up against a crash crunch that
prevents you from paying suppliers, buying materials and even paying yourself a salary. Its
a good idea then, to maintain a level of working capital that allows you to make it through
those crunch times and continue to operate the business. Short-term financing such as a
line of credit (LOC) can be used to make emergency purchases or to bridge the gap
between months-end payables and receivables. An LOC can be negotiated with your
financial institution, and this should be done before any need actually arises (BDC, 2005).
There are many risks involved in running a business, and serious challenges should be
expected at some time in the future. You can reduce the risk of cash-crunch due to this type
of situation, by planning ahead and having a more diversified client base. If youre not
dependent on one large order or client, your livelihood doesnt hinge on the health of
someone elses business. Finding new clients will increase revenue, improve your cash
flow situation and make you less susceptible tomarketplace adversity (Investopedia, 2005).
Monitoring costs and inventory is very important in business and cash management. Make
sure youre getting the best possible deal from your suppliers. You can do this by shopping
around and getting quotes from other suppliers. They may not be able to give a better
price, but may be able to offer better payment terms making it easier on your cash flow
