Effective cash management is essential for businesses to ensure they have the right amount of liquidity while maximizing returns. This involves optimizing the cash they currently hold and also improving cash inflows and outflows to increase cash on hand. By managing these aspects effectively, businesses can earn better returns and enhance financial efficiency.

Optimizing Cash On-Hand

When it comes to managing cash, businesses need to understand what cash they currently hold and how to optimize it. Typically, cash that businesses hold can be divided into three main components:

1. Operating Cash: This is the cash needed for day-to-day activities—money that is held in operating accounts to cover vendor payments, payroll, and other routine expenses. It's essential for the smooth functioning of the business, ensuring all bills and payments are made on time.

2. Emergency Cash: The general rule of thumb for emergency cash is to have at least three to six months' worth of cash set aside. This is crucial for dealing with unexpected expenses or business downturns. It serves as a financial cushion, allowing the business to navigate unforeseen circumstances without major disruptions. However, these balances can be lower if the business has access to a revolving line of credit or in the context of an individual’s financial planning, if they have access to a home equity line of credit.

3. Strategic Cash: This category includes cash set aside to help meet strategic business objectives, such as capital investments, purchasing new equipment, purchasing a competitor, launching a marketing campaign, etc.. Strategic cash is not immediately needed for operations or emergencies but is earmarked for future growth opportunities and therefore should still not be subject to potential capital loss.

By dividing cash into these three categories, businesses can better understand their liquidity needs. However, a common mistake is keeping all of this cash in an operating account or a savings account that earns little to no interest. For example, if your cash is sitting in a bank account that pays just 0.25% interest, you are essentially losing value against inflation.

To optimize cash holdings, each category can be better managed:

1. Operating Cash: Keep only the amount necessary for immediate operations in the primary operating bank account. Any excess cash above operational needs can be moved to a higher-yielding account.

2. Emergency Cash: Instead of letting emergency funds sit in a low-interest account, they should be placed in an account that offers market-leading interest rates, ensuring that the cash is working for the business while still being accessible in emergencies. Be certain to understand any potential timing delays in accessing these funds such as the need to liquidate t-bills, settle money market transactions, and ACH settlement windows.

3. Strategic Cash: Similar to emergency cash, strategic cash should not be idle in a low-interest account. Until it is needed for capital investments or strategic purposes, it should be held in a high-yield savings account or another instrument that offers better returns.

This is where Robora’s solution comes in. We analyze your current cash holdings, determine the optimal amount needed for day-to-day operations, and help move the excess cash to high-yield accounts, allowing your business to earn interest and stay ahead.

Optimizing Cash Inflows and Outflows

While optimizing the cash that businesses currently hold is crucial, an equally important component of cash management is optimizing cash inflows and outflows. By doing so, businesses can increase the amount of cash they hold and further enhance returns using the strategies outlined above.

When you think about a business's cash flow, the primary cash inflows come from accounts receivable—payments from customers for goods or services rendered. On the other hand, the primary cash outflows are payments to vendors and payroll expenses. To optimize these components, businesses need to focus on improving their cash conversion cycle, which involves:

1. Accounts Payable: Delaying payments to vendors as long as possible, without incurring penalties. For example, if a vendor offers 30 days to make a payment, delaying the payment until the end of that period allows the business to hold onto cash longer.

2. Accounts Receivable: Accelerating the collection of payments from customers. This could involve offering discounts for early payments or simply staying on top of late payments to ensure timely cash inflows.

The goal is to maximize the time difference between receiving payments from customers and making payments to vendors. This extra cash on hand can then be placed in a high-yielding account, generating additional returns for the business.

This is where Robora’s solution can also help. Robora helps you move the excess cash to high-yield accounts, allowing your business to earn interest.