MT Expert - Finance: Watch the cash

Cash management has never been more important, says General Atlantic's John Bernstein...

Last Updated: 31 Aug 2010

When the economy is in decline, focusing on cash is the key to survival for businesses. Any business owner or financial manager who does not manage cash needs, and who manages usage and/or availability under credit lines, is likely to be in for a rude surprise: in many cases, banks are restricting availability and increasing loan costs - while customers are deferring payments to manage their own cash positions.

Here are a few basic thoughts for companies when managing their cash:

1. Monitor the cash position. Step one is to make sure that the senior management team knows how much cash the business has, and that this is defined as cash that is freely available, not trapped.

2. Have a system in place. Develop a single point of contact and responsibility for execution, with appropriate oversight and control systems in place.

3. Know your investment policies. If you can't explain it in 2-3 sentences, it's too complex.

4. Know the risks you may be taking. While certain insurance or investor protections might be applicable, you should be comfortable where your cash investments are deposited and have confidence in your bank. Since dependable data on creditworthiness of banks is hard to come by, consider spreading deposits between banks.

5. Match your investment durations with your cash flow needs (both cash and currency). Don't place cash in long-term investments if you'll need cash in the short-term.

6. Avoid chasing short-term yield. Not surprisingly, returns are usually matched by the underlying risks – too good to be true is almost always not true.

7. Keep your principal safe. Downside protection is key in tough times. Working capital should be treated no differently than cash and should be managed as tightly as possible. Every company ought to know the monetary value of one day of net working capital (accounts receivable + inventory – accounts payable) and the number of days in its cash conversion cycle.

As a best practice, businesses should prepare a liquidity report on a monthly basis (daily for some businesses), which summarises cash investments, debt borrowings/availability, and total net working capital.

Only with careful management can cash provide the means not only to survive but to help businesses grow even in a downturn. Rarely has the term 'cash is king' been more appropriate.

John Bernstein is Managing Director at General Atlantic, a leading global growth equity firm providing capital and strategic support for growth companies. Founded in 1980, GA manages approximately $17 billion in capital and has more than 70 investment professionals based in Greenwich, New York, Palo Alto, London, Düsseldorf, Hong Kong, Mumbai and São Paulo.

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