The Importance Of Cash Management

Cash is ready money in the bank or in the business. It is not inventory, it is not accounts receivable (what you are owed), and it is not property. These might be converted to cash at some point in time, but it takes cash on hand or in the bank to pay suppliers, to pay the rent, and to meet the payroll. Profit growth does not necessarily mean more cash -- as we will see.

A lesson that all entrepreneurs learn is the difference between profit and cash. Profit is the amount of money you expect to make if all customers paid on time and if your expenses were spread out evenly over the time period being measured. However, it is not your day-to-day reality. Cash is what you must have to keep the doors of your business open, while you are busy trying to make a profit. Over time, a company's profits are of little value if they are not accompanied by positive net cash flow. You can't spend profit; you can only spend cash.

Cash flow simply refers to the flow of cash into and out of a business over a period of time. Watching the cash inflows and outflows is one of the major management tasks of an owner. The outflow of cash is measured by those checks you will write every month to pay salaries, suppliers, and creditors. The inflows are the cash you receive from customers, lenders, and investors.

A Cash Flow Statement is typically divided into three components so that you can see and understand the sources and uses of cash. These components include internal and external sources:

Cash Flow Statement

Catherine might have been able to avoid using her credit card to pay an "unexpected" bill if she had been practicing good cash management. Good cash management is simple. It means:

  1. Knowing when, where, and how your cash needs will occur,
  2. Knowing what the best sources are for meeting additional cash needs; and,
  3. Being prepared to meet these needs when they occur, by keeping good relationships with bankers and other creditors.

The starting point for avoiding a cash crisis is to develop a cash flow projection. Smart business owners know how to develop both short-term (weekly, monthly) cash flow projections to help them manage daily cash, and long-term (annual, 3-5 year) cash flow projections to help them develop the necessary capital strategy to meet their business needs. They also prepare and use historical cash flow statements to gain an understanding about where all the money went.


Copyright Information
Title:  The Importance of Cash Management
Author:  N/A
Originating URL: &
Document URL:
  Small Business Administration (SBA) does not object to anyone linking to us as long as the descriptive words of our site are accurate and not misleading and do not misrepresent an unofficial relationship between the linking site and SBA. SBA prefers that you link to our information, rather than "capturing" it because their information changes hourly and a small business person may be misled with outdated information. No permission is needed from us either verbally or in writing to link to us provided the above is followed. ( This website has chosen the "capturing" method due to the frequent re-arrangement of URL path names by The information herein is for education purposes only and should not be interpreted as "up to date."

Certain materials herein are included under the fair use exemption of the U.S. Copyright law and have been prepared according to the educational multimedia fair use guidelines and are restricted from further use. This work may be protected by further copyright, reproduction and distribution (in violation of United States Copyright Law).

Redistributed with permission.