Managing cash and controlling costs are crucial to any business. There may be times when you have to actually cut costs, either because they are excessive, or because your business is going through a down cycle. The following ideas are offered as suggestions, and many of them, rather than being one-time cost cutting actions, might become part of your ongoing cost control strategy.
Optimizing the Treasury Function
Cash Management
Cash management is essentially about making the best use of the cash that is available. There may be opportunity costs and trade-offs to consider. For example, surplus cash balances could be invested in short-term marketable securities, or a cash balance could be maintained to take advantage of cash discounts for prompt payments to vendors. There may be opportunities for expansion or growth that will require a substantial amount of cash. These considerations will vary from one business to another.
The magnitude of the cash management function will also vary between businesses. A small business may operate with just one bank account, while a larger business may have several accounts, including a separate payroll account, collections accounts, and disbursements accounts. If more than one location is involved, there may be separate bank accounts at each location. In this case, it may be useful to have an arrangement to “sweep” balances from different accounts and consolidate them in a central account, in order to invest surpluses in overnight deposits or other short-term investments.
However, in terms of controlling or cutting costs, the emphasis is on liquidity – having sufficient cash available in order to meet obligations and keep the business solvent. The following are some suggested ways of streamlining cash management:
Close out dormant accounts or consolidate accounts with little activity. This will eliminate unnecessary bank charges and is a good internal control practice to avoid any improper use of a bank account.
Negotiate the best possible conditions with banks, in terms of charges and fees, interest paid on checking accounts, charges for overdrafts, and interest on lines of credit.
Work with bank accounts on line, to closely monitor transactions and balances.
Reconcile bank accounts regularly and follow up on any discrepancies.
Optimize payments to vendors by utilizing credit terms and scheduling payments for the due date (30 days from invoice date, for instance).
Take advantage of prompt payment discounts (2% for payment within 10 days, for instance). This may be one of the trade-offs mentioned above.
Debt Management
Debt is a part of doing business, and in the form of financial leverage it may be beneficial and even necessary. But debt carries a cost – interest – and it should be carefully managed.
Alternatives to debt as a means of financing the business should be considered:
Increase capital. A sole proprietor may need to invest more of his or her personal resources in the business. Partners may need to increase their contributions to a partnership. A corporation may need to issue additional stock.
Use cash flow generated by the business for self-financing. This requires careful planning and cash flow forecasting.
Leasing may be an alternative to borrowing in order to purchase capital goods.
The type of debt that best suits the needs of the business should also be taken into account:
A revolving line of credit, that the business draws against as needed, may have a lower overall cost than a loan for a fixed amount.
Secured loans may have a lower interest rate than unsecured loans.
It may be possible to negotiate the cost of debt – interest rates, origination fees, and other charges.