Importance of Cash Management in Small to Medium Sized Businesses Essay

Importance of Cash Management in Small to Medium Sized Businesses - Essay Example Cash management is important to SME as it regulates cash flow and prevents prolonged cash shortages that result from too much difference between cash inflows and cash outflows.3 Cash inflows come from customers, lenders and investors, while cash outflows include payments made to suppliers, creditors and as employee salaries. Negative cash flow occurs when cash outflow is more than cash inflow (due to several reasons such as weak debtor collections, outdated inventory, etc.); in such a situation, the SME is forced to borrow money from lenders, otherwise it will be in bad trouble – the main source of which is non-payment of dues to creditors, suppliers and employees. SME do their best to avoid this scenario and instead strive to attain a positive cash flow, which takes place when the cash inflow is more than the cash outflow. The overall aim of the SME is to generate profit. But the amount of profit earned is meaningless if the SME does not experience a positive cash flow, simpl y because it is possible to spend cash, not Cash management techniques of SME and consumers are similar in several ways, while they also differ in many ways. SME cannot therefore practice all techniques as consumers and vice versa. There are 5 cash techniques of consumers that SME can practice, as these are sound methods conducive towards generating a positive cash flow as well as profit for the enterprise. Firstly, it is important and practical to prepare a cash flow projection for a certain period (usually 6 months), forecasting the income and expenditure over that period.5 Secondly, it is a good practice to set aside a certain amount as emergency fund to be used in case of unexpected developments.6 Thirdly, leasing of equipment presents a better alternative as compared to purchase, as the former does not result in cash blockage that is caused by the latter.7 Fourthly, the overall aim is to create profit (savings in case of