Cash Management Practices in Small Companies
Harvard Business School
9-699-047
December 4, 1998
Cash Management Practices in Small Companies
Of all the disciplines that a small company must master to grow and succeed, none may be more important than cash management. While a strong cash management system can ensure that a company maintains adequate cash levels to meet its operating and investment requirements, an inadequate cash management system can lead to a company’s failure to meet its financial commitments. All too often, poor cash management systems have led small business managers to liquidate or reorganize under Chapter 7 or 11 of the Bankruptcy Code. Most small business managers claim that cash management is their leading concern. Often walking a tightrope between growth and illiquidity, small business managers face different cash management challenges than their counterparts in larger companies. Compared to larger firms, small businesses often have under-staffed and under-trained accounting staffs, volatile cash flows dependent on a single product line, limited access to new capital, and a significant share of their net worth tied up in working capital. These limitations are often compounded by management’s focus on growth, which can put additional pressure on the cash management system by increasing net working capital requirements. Yet, despite its importance, few small business managers can dedicate significant time managing cash. Most develop a set of techniques to avoid cash crises, but many of these “systems” are as basic as matching receivables to payables. Most cash management systems in small companies employ a fraction of the tools available to them, as small business managers rarely have a forum to transfer knowledge about management practices. While each company has certain strategies that are more appropriate for it depending on the type or size of its business at a given time, the goal of this Note is to provide managers with a broader universe of specific techniques used by
9-699-047
December 4, 1998
Cash Management Practices in Small Companies
Of all the disciplines that a small company must master to grow and succeed, none may be more important than cash management. While a strong cash management system can ensure that a company maintains adequate cash levels to meet its operating and investment requirements, an inadequate cash management system can lead to a company’s failure to meet its financial commitments. All too often, poor cash management systems have led small business managers to liquidate or reorganize under Chapter 7 or 11 of the Bankruptcy Code. Most small business managers claim that cash management is their leading concern. Often walking a tightrope between growth and illiquidity, small business managers face different cash management challenges than their counterparts in larger companies. Compared to larger firms, small businesses often have under-staffed and under-trained accounting staffs, volatile cash flows dependent on a single product line, limited access to new capital, and a significant share of their net worth tied up in working capital. These limitations are often compounded by management’s focus on growth, which can put additional pressure on the cash management system by increasing net working capital requirements. Yet, despite its importance, few small business managers can dedicate significant time managing cash. Most develop a set of techniques to avoid cash crises, but many of these “systems” are as basic as matching receivables to payables. Most cash management systems in small companies employ a fraction of the tools available to them, as small business managers rarely have a forum to transfer knowledge about management practices. While each company has certain strategies that are more appropriate for it depending on the type or size of its business at a given time, the goal of this Note is to provide managers with a broader universe of specific techniques used by