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Why
Do I Need A Cash Management System?
For most business start-ups, managing cash can be relatively simple
if you don't have a whole lot of receipts coming in at the beginning,
and most of your initial expenses are for start-up costs and to
get your operation going.
This is the perfect time to set up a Cash Management System.
The objectives are as follows.
First,
you want to ensure that you can easily manage the money coming
in vs. the money going out.
Secondly,
if you have budgeted well, you will have cash reserves that can
be earning for you until it's time to use that money for expenses.
The third objective is to ensure that, when you make owner withdrawals,
you are not putting yourself in a position that will leave the
business stranded for cash later on.
There are other inherent advant-ages here, too, such as providing
yourself with better Audit-ability and accounting control.
Choose A Bank And Open
Your Accounts.
When
choosing a bank, there are several things you will want to consider.
These are listed in Banking Priorities on this page.
You should review the diagram and determine the order of your
priorities, then use this priority-order in selecting your bank.
At the very minimum, you will want to open an interest-bearing
savings account and a low- or no-fee checking account.
If you will have payroll, you may also want to open a second
checking account for the sole purpose of disbursing paychecks
and payroll taxes.
Deposit the minimum balance in each account, then "forget"
that it is there.
This will help you avoid charges that occur for not maintaining
the bank's minimum.
Congratulations!
You've now taken the first step in a successful cash management
system.
Start out Right.
What you
do in the beginnings of actually using the system will prepare
you for most of the situations that will occur in the future of
your business.
To keep things simple, let's say you start the business on the
1st of the month with $10,000 which includes $1,000
in your main checking account and $1,000 in your payroll account
(your minimum checking balance) and the remaining $8,000 in the
savings account.
Now let's say you have some start up costs on the 10th,
such as office supplies, lease deposits, rent for office space,
new equipment, etc. totaling $5,000.
You would now move $5,000 from savings into the main checking
account, and write checks to pay these costs.
You now have $3,000 still earning interest in savings and
have maintained the minimum balances in main checking and payroll
checking.
Further, let's say you complete one job (or sale) during the month
and hire one employee.
The employee's wages for the first biweekly period are $1,000
and you are to pay him/her beginning on the 20th of
the month.
For this pay period, you calculate withholdings for the employee
of $300, and employer taxes of $100 due by the 15th
of next month and $25 due at the end of the quarter.
On the 19th of the month, you now want to transfer
$1,125 from savings to the payroll checking account and on the
20th, you will write a paycheck to the employee for
$700.
This leaves you with $1,875 in savings, still earning interest.
You also are now assured of having enough money in the
payroll account to cover payroll taxes as they become due.
Let's now assume that you had to pay $875 for some of the materials
you used on your company's first job.
Once again, you transfer the money from savings to checking
and write the check.
We now have $1,000 left in savings, which happens to be
the minimum balance for that account.
It's time now to get paid.
After all your hard work, you receive a check on the 25th
for $20,000 for that first job. Deposit this check immediately
into your interest bearing savings account.
You now have $21,000 earning interest in savings, $1,000 maintaining
the minimum balance in the main checking account, and your payroll
checking has enough money to handle your current payroll tax liabilities.
Now
it's the last day of the month.
After checking your budgets and payables, you find that you now
expect $10,000 in expenses due during next month, and you estimate
payroll expenses to be $3,500.
You also have determined that you want to maintain a cash
reserve of at least $5,000 available for unexpected or incidental
expenses.
This leaves you with $2,500 that isn't immediately committed to
anything.
Now you get to do the most pleasurable part of running
your Cash Management System.
You get to pick from one of the following options:
1. Leave the money in the account and let it keep earning interest.
2. Put the money toward marketing, new equipment, more inventory,
or something else to help grow the business.
3. Move some or all of the $2,500 into an investment such as a
mutual fund.
4. Take some of the money for yourself.
After all, that's why you started the business.
What
Did All This Extra Work Really Do For Me?
Well, for one thing, when your bank statements
arrive they will be much easier to reconcile.
Secondly, you have ensured that you won't have to scramble to
find cash when payroll taxes come due.
Third, at no time during the month did you have any problem determining
how much cash
you had available.
And lastly, you have earned and will continue to earn interest
income on your cash reserves.
Written by Christopher W. Nyce for The Varrenti Company, Inc.
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