Managing the Flow, Part II

Regulating cash takes three levels of investment

Last month, we looked at key factors affecting cash flow. Here are some ways to manage the cash you earn, to make the most efficient use of your liquidity and provide your company a cushion to absorb the shock of crises without sacrificing financial health.

A good cash management plan involves at least three levels of investment. Just as you do with effective leveraging, you want to time your investments to maximize return, while ensuring availability when you will most likely need it for future asset acquisitions or monthly expenditures.

The first tier is your “bread and butter” level, the balance that is always available. This is the bare minimum you would need to operate for one or two weeks, and it should be invested for the long term in bonds, treasury bills, certificates of deposit with terms longer than one year and similar vehicles. This money is your emergency fund and should be earning the highest interest, because you hope never to have to use it. Since it is your minimum level of available cash, if you ever have to break into it, you know that your business is failing.

The second tier is the “short-term crisis” level. Though you hope not to tap it, it will cover two or three months of expenses if there is a temporary timing problem with payments, or you face an unexpected purchase opportunity. Plan your annual outflows based on your current budget, including any balloon payments due on loans, seasonal expenses such as tax payments, insurance premiums and year-end bonuses. Create a schedule that operates like a “tickler file” and allows you to invest this money in interest-bearing accounts such as short-term CDs or mutual funds, planning your purchases and conversions to coordinate with your monthly needs. This way, you will always have funds to convert to cash if you need it.

The third tier is the amount you need for daily expenses. The level will fluctuate, but remain within a fairly predictable range. This cash must be liquid, in a checking account or cash fund on which you can draw immediately. Usually, this will cover your expenses for a week or two.

Don’t confuse cash management with leveraging. Using your line of credit for emergencies is not the same as planning your investments to cover cash needs. You may generate cash to invest by taking on debt you need, since bonding companies and lenders will often prefer to see some leveraging. Or, you may choose to factor your receivables to generate cash for short-term needs, if the fees are reasonable, to avoid liquidation penalties on long-term investments.

You need a consistent management program that times investments to balance liquidity with optimal return. Unfortunately, many business owners fail to earn adequate returns on their cash usually because they don’t have the time or the knowledge to choose investment vehicles properly.

A cash concentration account will allow you to consolidate and manage all accounts with a particular depository, such as a bank. It can be linked to your line of credit and your savings account and allows you to manage your balances for payroll, job site and other specific checking accounts.

Get extra float from your cash by using sweep accounts that tap into your interest-bearing funds daily to cover only checks that clear for that day or zero balance accounts located in small, remote banks that clear checks only once every day.

For large payments, negotiate electronic funds transfers from your clients. Using a lock box, usually a post office box in a federal reserve bank city, allows you to receive incoming payments two to three times daily and is a way to expedite deposit of your receivables if you are receiving a high volume of checks for service work or other smaller jobs.

Banks will often access your lock box and deposit the funds, saving you internal labor time for a small fee, and the ability to deposit your funds and earn interest for a few extra days adds up to significant funds over the course of a year.

Monitor financial access carefully. If you use job site checking accounts to allow your project managers to pay for permits or other expenses as needed, make sure you set a maximum allowable check amount. Be especially careful when you issue company credit cards, one of the primary causes of cash slippage and employee theft.

Set a defined maximum for petty cash accounts, reconcile at least once per month and have one employee monitor receipts and disbursements. A positive pay account provides an interface between cleared checks and your list of disbursements, preventing any unlisted checks from clearing. Online programs that allow you to immediately check bank activity, such as Quicken, have largely replaced such accounts.

If you don’t have a cash management policy, create one. It sets the goals and parameters for any employee handling your investments. Defining investment principles such as preservation of capital, degree of acceptable investment risk and portfolio percentages will keep everyone walking the same path and keep your cash from walking away.      EC

NORBERG-JOHNSON is a former subcontractor and past president of two national construction associations. She may be reached via e-mail at


About the Author

Denise Norberg-Johnson

Financial Columnist
Denise Norberg-Johnson is a former subcontractor and past president of two national construction associations. She may be reached at .

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