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The importance of business cash management

August 28, 2024

Managing cash effectively is a key ingredient to business success. Discover more about planning for seasonal fluctuations and optimizing the returns on your business cash.

Key takeaways

Managing cash effectively is a critical part of running a successful business.
Many businesses experience seasonal fluctuations in sales and expenses, and it’s important to plan ahead for slower periods.
An array of financial instruments let you earn returns on the excess money generated by your business.

Contributors

Mary Mannion

Senior Associate, J.P. Morgan Wealth Management

No matter the size of your company or the industry you’re working in, managing cash is a key ingredient in running a successful business. Beyond ensuring that you have enough money to cover your costs and fund your operations, cash management can play an essential role in growing your company and setting you up for a successful future.

In this article, we’ll explore the basics of business cash management, including how you can navigate through slower business seasons as well as help maximize your yields to make the most of the cash generated by your business.

Why is cash management important?

Simply put, cash management means overseeing the money coming in and out of your business, making sure that you have enough funds to cover your costs, weather financial uncertainties and capitalize on new investment opportunities. In other words, effectively managing cash allows you to enhance the liquidity of your business and optimize your profitability.

The process of tracking the cash that’s entering and exiting your business typically takes the form of a cash flow statement. As the name suggests, cash flow represents the amount of money flowing into and out of your business over a given time period.

The items you include in your cash flow statement may vary based on the type of business you run, but monitoring your cash flow is always critical because, even if you’re turning a profit, you’ll run into problems if you don’t have cash available when you need it.¹

Preparing for cash seasonality

Every business is unique, and effective cash management involves plenty of moving parts. But one common challenge faced by many businesses is that sales tend to be seasonal and slow down during certain parts of the year. For example, an ice cream shop will probably pull in higher revenue over the summer, while fewer customers will be in the mood for a frozen treat during the depths of winter.

While an ice cream parlor may be an extreme case, many companies see fluctuations in cash flow due to seasonal variations in sales, expenses or market conditions. To prepare for slower business seasons, it’s essential to analyze historical cash flow data and identify patterns. By understanding when cash inflows and outflows are likely to peak or dip, businesses can adjust their cash strategies accordingly.

During peak seasons, you may want to set aside extra cash to use during slower periods. Creating a cash reserve or establishing a line of credit can provide a financial cushion to cover operational expenses when cash flow is low. Keeping a close eye on your cash flow projections and adjusting your budget can also help you adapt to shifting market conditions.²

Earning yield on excess cash

Once you’ve prepped your cash flow statement and set aside the funds to cover your operating costs and account for any potential slow season, the question becomes what to do with excess cash. Fortunately, the extra money generated by your business doesn’t have to sit idly – consider putting that cash to work for you by placing it in high-yielding financial instruments.

The best place to stash your business cash often depends on your liquidity requirements, or how soon you might need to access the money. Short-term investments like money market accounts, certificates of deposit or short-term bonds may offer higher returns than traditional savings accounts without sacrificing too much liquidity, allowing you to earn attractive returns on idle cash.

If you’re able to sock away your business cash for a more significant stretch, you might consider longer-term investments like Treasury bonds, corporate bonds or mutual funds. Since these investments may have longer maturity periods, they may tie up cash for a longer duration.

Another potential option for what to do with your excess cash is to consider liability driven investing, which is an investing strategy that can help generate income to help pay off future expenses. Liability driven investing can be especially helpful to business owners because it can help to mitigate risks associated with keeping cash on hand while also potentially growing returns to cover payment obligations.

And, generally speaking, diversifying investments across different asset classes and maturities can help mitigate risks and optimize returns.

Bottom line

Cash management is vital to keep your business thriving and to navigate through seasonal fluctuations. By preparing for seasonal cash flow cycles and maximizing yields through strategic investments, you can ensure financial stability and make the most of your business cash assets.

The key to successful cash management is to plan ahead and stay agile so that you can respond to changes. Accountants and other financial professionals can help you develop an optimal cash allocation strategy for your business.

Frequently asked questions

How should cash be managed in a business?

Effective cash management is an essential part of a successful business plan. This means forecasting the flows of money in and out of your business and planning accordingly.

What should I do with excess business cash?

Rather than letting cash sit idly, consider stashing your extra funds in financial products that can generate attractive returns. Some options to consider include certificates of deposit, money market accounts and different types of bonds. The ideal cash strategy for your business depends largely on how soon you might need to access the money.

What is cash seasonality?

Many businesses experience stronger sales in certain parts of the year, while other periods are slower. Part of a successful cash management plan involves anticipating and preparing for the seasons when your sales will be sluggish.

References

U.S. Small Business Administration, “How to understand cash flow statements.”

U.S. Small Business Administration, “The pros and cons of running a seasonal business.” (June 8, 2016)

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Key takeaways

Contributors

Why is cash management important?

Preparing for cash seasonality

Earning yield on excess cash

Bottom line

Frequently asked questions

References

Connect with a Wealth Advisor

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Key takeaways

Contributors

Why is cash management important?

Preparing for cash seasonality

Earning yield on excess cash

Bottom line

Frequently asked questions

References

Connect with a Wealth Advisor

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