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Using Cash Wisely

The only thing more precious to your business than customers is cash. Why is it, then, that cash rarely gets the attention it deserves at most companies?

It could be that some owners think of cash as simply a result of their business process.   They do not realize the extent to which cash can be managed. They think of managing people, trucks and sites, but rarely cash. Sadly, without active cash management, the typical petroleum company loses tens of thousands of dollars each year.

If you want to manage your company’s cash for more profit, here’s what to do:

1) Deposit daily – Checks and currency do you absolutely no good sitting in someone’s top drawer or your safe. Make sure that every penny received at every location is deposited daily.

2) Aggregate all cash into one main account – Other than cash that must be left on site (store cash drawers,etc.), all funds for your total company should flow into one account at the end of each day. It is almost impossible to manage your cash unless it is in one easily accessible location.

How do you do this? The easiest way is to have your main bank do this service for you electronically. Other than the smallest community banks, most banks can sweep money from any other institution at the close of the business day. Particularly for large store chains or jobbers operating in multiple states, electronic sweeps are the only way you will be able to optimize your cash management.

3) Make the main account a zero-balance account – This means that every night, after all the cash comes in from your various locations, all that cash is taken out of your non-interest bearing checking account. Where should it go? Read on…

4) Pay down bank lines daily – Unless you want to put your cash into a super-earning project that will net you more than 10% per year, your best use of cash is to pay down short term debt.

At Meridian, we often see medium-sized jobbers with as much as $500,000 total cash sitting around idle in a myriad of accounts. If this cash were aggregated into one account and used to pay down a bank line, the savings would be about $50,000 per year!

What if you don’t have a bank line balance but instead long term debts. Should you pay down your equipment or real estate notes early? The answer to this question depends upon two considerations.

First, is there a prepayment penalty on your loan? If so, it is usually not economically wise to pay the debt off early. Second, when will you need that money again? If you pay off a long term note early, and then need cash in a week or two, you’ll be stuck. Therefore, only pay down non-penalty debt ahead of schedule when you’ve had a very profitable year and feel you will never need that cash again.

5) Invest your cash for optimal return – For some marketers, reinvesting in their own profitable operations will net a better return than any savings or money market account. If you don’t have a profitable project awaiting your extra cash, however, use investment services.

Most commercial banks now offer a wide range of investments with a variety of holding times. Match your investment to the time frame for the use of your cash.

Many banks offer interesting portfolios of auto loan notes, mortgages or even credit card pools which can take minimum deposits of $100,000 and provide much higher rates of return than typical overnight funds. Be aware, however, that most of these investments are subject to market rate risk. If you could not tolerate a loss, stick with lower yielding but guaranteed investments.

Once you’ve mastered aggregating and using your cash wisely, you’ll soon come to realize how much more profit you could create with just a little more cash!

If you’re like most marketers, you immediately visualize your profit and loss statement when asked to think about creating more cash. Although raising margins and instituting cost-cutting measures are viable cash-producing strategies, balance sheet management almost always produces more cash in a shorter time frame.

If you read last month’s MFA, you know the three critical factors to more cash: accounts receivable, inventory and payables management. In a typical $25,000,000 annual sales volume company, expect a very quick $500,000 increase in cash by tighter management of just these three critical factors. These equates to a cash increase of over 2% of annual sales when management starts managing just these three balance sheet items.

A few years back, we worked with a $30,000,000 annual sales revenue company where we were able to make a $1,500,000 increase in cash in just three months! Managing their balance sheet saved them $50,000 in annual loan interest and earned them another $50,000 in investment earnings in the process. The actual impact to the bottom line in just the one quarter was a net gain of $25,000. Not too bad!

Optimizing cash takes work. It’s takes dedicated staff and time. If you go at it seriously, however, you can make just as serious an impact on your bottom -line profits. It’s worth it!

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