Business owners might think that the company’s cash surplus is a foundation to make a well-informed business objective regardless of the appearance of end-profits. After all, the goal of every business is to earn revenues, ideally more than the costs it incurs. However, having a tremendous amount of cash as an indication of wealth is a common misconception. On the contrary, this could even mean improper business management.
Here are two important reasons a professional chartered accountant would advise on not keeping a lot of cash in the office.
Cash is definitely the most obvious target of the ill-natured. It is because of this fact that in auditing and accounting service cash inflow is a priority. Keeping cash within a minimum level is a good business practice.
Having adequate internal controls for cash is a basic requirement in running a business. Certain duties should be segregated in order to avoid any mishandling of cash. These are custody of the cash, recording of the balances and approval of any disbursement. While these activities should be done by different people, there shouldn’t be too many of them who handle it before it is deposited. It is also important that discrepancies are regularly identified and reconciled in every step.
2. Opportunity Costs
Cash is considered the most liquid type of asset. This means it is very easy to move, exchange or convert. However, we have to look at it as an asset value that grows. When you lend to reliable borrowers or invests, you disburse excess cash today and get it back with a little cherry on the top in the near future. Or when you invest in other types of business, this could produce its own profits instead of being idle. Imagine the opportunity you’ve forgone by just letting your cash sit in a bank and earn little to no interest which may not even make up for the service fees and other charges the bank is charging!
There are other risks involved in dealing with cash and liquid assets. Fluctuations in foreign currency exchange rates, liquidity issues and causing red flags to banks are just to name a few.
Here are the key points to counter the risks in handling your cash and liquid assets.
Simple tricks such as not paying bills until they are due and being efficient in collecting from customers could help optimizes your available cash. Having high receivable turnover and negotiating with suppliers to give you more relaxed terms could help you optimize your cash flow by prioritizing urgent payments.
Managing internal transfers to avoid idle funds and going below the maintaining balance required by banks is another simple but helpful tip. Managing transactions in different currencies and knowing which is best based on prevailing exchange rates could help. Foreign exchange gains may be individually small but can quickly accumulate into significant amounts.
Another underrated method is financial forecasting. Monies acquired from the past and being held in the present can be improved once the behavior of cash flow is observed and predicted. There is power in being able to tell the likely future!
These hacks & tricks are easy to implement but maintaining them can be overwhelming and take some discipline. Technical accounting knowledge may also be required to put them in place.
You can learn more about how to effectively manage your resources from one of the best local accounting firms. CRESCO Accounting offers a wide range of accounting services according to your business’ needs at a cost-effective price.
When you outsource your accounting needs to us, you don’t just get convenience in handling your day-to-day business but the security in knowing we are here to help you expand it through financial advisory and consultation.