What is Cash Management?

What is Cash Management?

Created by
Mike DeFeo
April 13, 2023

My dad was a serial entrepreneur - the list of small businesses he started up or participated in is too long to recall. When it comes to the difficulties of cash management, one of his companies provides a striking illustration: the gas station.

I watched my dad go through challenges that are incredibly common for entrepreneurs. One of those challenges was paying for inventory.

Gas stations don’t make much profit on each gallon of gasoline sold, so they have to sell a lot to make the business worthwhile. To support this high volume of sales, gas stations have massive underground tanks to store their inventory, gasoline. Filling these large tanks is expensive, though. So how did my dad pay for this? Paying for the gasoline with cash from sales income was optimal, but most sales were paid for on credit cards. Unfortunately, the cash from credit card sales wasn’t deposited into the business bank account until a week later. This led to a multi-week lag between when inventory was purchased by the business and when the cash from sales was available in the bank. As a long-time entrepreneur, my dad had a sixth sense for his companies’ inflows and outflows. I’m pretty sure he never opened a spreadsheet to model the gas station’s finances. He didn’t need to for the most part. Yet, challenges arose when two specific events lined up. The first event was an inclement weather forecast. Folks in town planned for snow as if it was the apocalypse - making sure their vehicle had a full tank of gas ahead of the weather was critical in their minds. In preparation, the gas station would have to get a much larger gasoline delivery than anticipated with the incoming storm. As a result, the business needed a lot of cash immediately for inventory that wouldn’t result in income for weeks. The second event was a lack of access to credit. His line of credit with the bank is how he would access additional cash when the business wasn’t holding enough for these unanticipated events. On somewhat irregular occasion, the bank required a bunch of new reports to re-authorize his credit line. Until he prepared those reports to the bank’s satisfaction, he couldn’t use his line of credit. As a result, the business could temporarily only use the existing cash in the bank account for gas deliveries. With inventory on the way but no cash or credit to pay for it, what is an entrepreneur to do? Luckily, my dad maintained great relationships with his vendors. He could lean on this goodwill for flexibility to pay late on occasion. It kept the business afloat, but tapping into this goodwill was not something he could do regularly without harming his most important vendor relationships - similar to the way you’d want to avoid asking your landlord for the flexibility to pay rent late too often even if you’re a fantastic tenant otherwise. I was too young for the details, but the palpable stress caused by the situation made it obvious when it was happening.

Among many challenges I saw firsthand, this one made an impression on me: entrepreneurs are incredibly reliant on the smooth management of cash.


Why good cash management is important

The story of my dad’s gas station is an example of a business ensuring bills and debts are paid - a concept referred to as solvency. He got the vendors paid, but it wasn’t the ideal model of cash management. Some of the tools discussed below certainly could have helped reduce the stress of the situation!

With his vendors paid, my dad was able to focus on profitability and investing in growing the business - rebuilding the convenience store to support higher profit items and upgrading the equipment along the way.

Overall, there are four outcomes which complete the picture of cash management.

  1. Maintaining solvency.
  2. As mentioned, solvency is the ability of a business to pay bills and debts. This is one of the most fundamental elements of operating a business and one which requires some level of competency with cash management - as we all know from our personal lives, the bills won’t pay themselves!

  3. Achieving profitability.
  4. Profitability is the concept of a business producing more income than expenses. Cash management involves the analytics to understand what an entrepreneur can do to increase income and decrease expenses as well as the tool kit to execute on some of those profit-boosting ideas.

  5. Growing the business.
  6. With a healthy business afoot, long-term investments in future growth can be considered by the business - improved equipment and new locations are common growth investments made by entrepreneurs. Understanding when the business can support this and how to make the investment as affordable as possible are both cash management exercises.

  7. Reducing stress.
  8. We all know the stress of money from our personal lives - entrepreneurs feel this stress as acutely when it comes to their business. A streamlined cash management toolkit can alleviate an immense burden for entrepreneurs in all stages of their business.

The tools of cash management

Hopefully, it is clear by now that cash management is a critical element of running a business. There are a few core activities involved with cash management. While not a complete list, understanding these will cover a broad range of cash management needs for businesses.

  1. Analysis and Forecasting.
  2. Reviewing what has happened in the past (analysis) and attempting to understand how things will evolve in the future (forecasting) are critical to having a good grasp on a business. Entrepreneurs may not always have an intuitive understanding of where their money is going or coming from and when - so how can they be expected to make the best decisions to drive the business? The discipline to review historical data and attempt to project it forward will develop this intuition.

    Further, building a strong forecasting model will help decision makers understand quantitatively how a growth investment, for example, may improve the business. Decisions around where to spend money can be made with much more confidence with this tool.

  3. Working Capital Management.
  4. The funds that a company has available to operate the business on a day-to-day basis is called working capital. Loosely, it includes all payments due or assets which can be converted to cash within 90 days: credit card balances, outstanding invoices and inventory are all included here.

    A business can bolster their cash balance quite a bit by optimizing their working capital. Examples of this include working with vendors to pay invoices later, keeping smaller quantities of inventory on hand, and collecting payments from customers sooner. All of these help increase the cash balance of the business without impacting operations.

  5. Investing.
  6. While having a healthy cash buffer is good, excess cash should be put to work! Investing in either business improvements or savings products can ensure that the company’s cash isn’t idle.

    Common investments in business improvements include marketing for revenue growth, software for cost efficiency, improved equipment for productivity.

    Savings products include bank savings accounts and money market funds, which ensure that the business is earning income on cash that isn’t needed for day-to-day operations.

  7. Financing.
  8. Sources of cash outside of revenue are considered financing for the business. For example, selling shares in your business in order to fund startup costs or getting a loan from a bank for a big purchase are both sources of cash that aren’t revenue.

    A good financing strategy can bolster many business activities. Some of the most common include credit cards and lines of credit for managing working capital shortfalls, term loans for large equipment purchases or new locations, and equity sales for investments with less certainty in their eventual cash returns.


While I didn’t realize what was going on at my dad’s business as a kid, the importance of cash management resonated with me after learning about the challenges of running a business.

Building a strong toolset around cash management pays dividends — figuratively and literally. Luckily, there are more tools than ever emerging to help entrepreneurs with these challenges.

At Basis, we’re excited to catalyze this growing set of tools and financial services focused on helping businesses thrive.