Cash flow has been called the lifeblood of business, and it’s easy to see why. Sure sales and profits are important, but it’s cash that keeps the wheels of your company turning. This makes effective cash flow management one of the most important tasks for any business owner. Understanding the basic concepts of cash flow and how to use cash management tools offered by commercial banks can help your business gain a competitive edge.
Cash management can be divided into three primary components: collections, disbursements, and information reporting.
For most businesses, better cash management starts with more efficient and timely collections. A bank lockbox is one of the most helpful tools to speed up collections and maximize available cash. Instead of mailing payments directly to your business, clients mail them to a special post office box that the bank checks multiple times each day, including weekends and holidays. Payments are processed around the clock, which reduces mail and processing float. Also, image technology improves accuracy and enables better audit controls.
There are two kinds of lockbox services: wholesale, which is designed for companies that receive a low volume of high-dollar remittances, and retail, designed for companies (such as utilities) that receive a high volume of low-dollar remittances.
Companies that receive a high volume of checks at the point of sale, such as retailers and medical professionals, may benefit from remote deposit capture. With this service, you receive a specially designed desktop scanner and software that enable you to transmit check images to the bank remotely from your place of business. You reap the time and cost savings of not having to send employees to the bank to make deposits, as well as greater accuracy, better float management, and faster access to funds.
Disbursement and Reconciliation
The flip side of collections is disbursements, or how you’re paying your suppliers and vendors. The goal is to hang on to your cash as long as possible, within your agreed upon vendor terms.
Banks offer a variety of online payment options through Automated Clearing House that can help you streamline your payables, reduce costs, and improve cash management. These include payroll direct deposit, preauthorized debits and credits, cash concentration, and electronic tax payments.
Going hand-in-hand with disbursements is account reconciliation. With these services, the bank simplifies the task of reconciling your bank account by providing you with electronic check-paid information. You save time and money through streamlined end-of-month reconciliation and reduced exposure to check fraud.
Positive pay is a specialized account reconciliation service that helps further reduce the risk of check fraud. The bank compares all checks presented for payment each day with a check-issued list you send and pays only those that are an exact match with your list. Others are flagged as suspect and reported back to you so you can decide whether to pay them.
Cash management is made more difficult for many smaller businesses due to a lack of access to timely and accurate account information. Banks offer a variety of online information-reporting services that provide detailed up-to-the-minute data that can help you make better financial decisions. This includes prior- and same-day account balances, lockbox detail, account analysis, and more.
When you know what your cash position is at any given time, you can make important cash management decisions more easily, decisions such as whether to pay down or borrow from a line of credit or move excess funds into short-term investments. These kinds of reporting services may also enable you to initiate online transactions yourself (such as Automated Clearing House, wire transfers, and tax payments) and view check images and deposit tickets online.
Don Sadler is a freelance writer and editor specializing in business and finance.