This is not an "angel investor."
Businesses need to manage cash to ensure they have enough on hand to pay bills as they come due. A term for this is liquidity, which is quite distinct from solvency. A business is solvent so long as its assets outnumber its liabilities. Not all assets, though, help with paying bills. You must pay bills to keep the doors open, however impressive the balance sheet.
Cash and Other Assets
Assets on a business balance sheet may include inventory or accounts receivable. A business hopes to turn both of these into cash, but they are not cash in themselves, and thus do not support the checks that go out every month to pay debts, rent, other overhead costs, or wages. Cash -- ready money in a bank account or the equivalent -- backs those checks.
Good cash management involves at least three points. First, a business must keep track of when it will need to make payments. Second, it must know the best sources for doing so, with the lowest possible transaction costs. Third, it must keep good relationships with its banks and with other parties important to its cash flow.
Streamlining Invoices
MarkMaster Inc., a manufacturer of customized banners and nameplates based in Florida, has streamlined its conversion of products into cash over the last 10 years by moving to a cloud-based e-commerce system. Streamlining was especially important to MarkMaster because its average invoice was just $11. The friction inherent in using paper and mail delivery for these invoices can have debilitating consequences. With cloud-based transactions, though, an invoice automatically goes out, with almost no cost, as soon as the company fills an order, sometimes even before, according to MarkMaster CEO Kevin Govin, in an interview for the Web blog "Big Fat Finance."
Sweep Accounts
Many brokerages offer "sweep accounts," to aid the cash management of their clients. A sweep account is one in which the cash available at the end of a day is "swept" into an interest-bearing account overnight, typically a money market fund. This allows that money to earn virtually risk-free interest without sacrificing liquidity. Dan Caplinger, writing in "The Motley Fool" in 2007, said, "It's critical that you make sure your uninvested cash is paying you interest while you wait."
Cash Outside Operations
A common situation is a business has more cash going out than is coming in from its operations over a time. Still, it is confident that its products and business plans are sound, and the income will exceed the outflow eventually. Unfortunately, it needs to stay in business long enough to benefit from that eventuality.
In such cases, cash management includes obtaining cash through means other than the core operations of the business, such as through the sale of equity, or through borrowing.
Individuals, poetically called "angels," provide money to small businesses in these circumstances. Cash management means understanding that you do not find angel investors through prayer, but through research and networking.
Tags: cash management, balance sheet, into cash, must keep