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Nothing takes the place of a great product, efficient systems and excellent value to build a successful manufacturing business. Yet strategic financial management steps, however small, are essential for a smaller business to step into growth. One way to accomplish that is through smart cash management.

Cash management speaks to the daily management of cash flow, where the overarching goals are to monitor and maintain liquidity while making sure idle cash earns the highest possible rate of return.

At the same time, maintaining equilibrium in your receivables and payables is important because the business needs access to reliable funding for payroll, expenses and materials, while also paying down debts and paying vendors on time.

While running a business in a way that minimizes reliance on credit is admirable, it’s just as important to make sure that those cash reserves aren’t an idle resource that holds back an area of growth for your business. The following will talk about idle cash and how cash management tools, like a sweep account, can help a growing manufacturer make the most of cash flow.

What is idle cash?

Basically, idle funds are such because they’re not earmarked for an expenditure, nor are they invested back into the business, whether it’s through a money market account or an investment. Having reserves is a smart business move, but if they’re not growing in value, that can work against business growth in the long run.

  • Opportunity costs: If the money isn’t earning its full potential in interest, that decreases the value of these funds over the months and years.
  • Inflation: Over time, the purchasing power of one dollar decreases.
  • Growth: Wise cash management and investment practices are an important piece of expanding those rainy-day funds to meet the current needs.

Consider the returns if this idle cash were put to work in the long run: one, five and 10 years. Building a successful business involves incremental steps, and this is one to know about and put into practice.

How can you put these idle funds to work?

If the business has idle funds or cash equivalents, the smart solution is to set up a system that sends these funds into an account that lets this cash grow and appreciate.

First, it’s crucial to determine the company’s liquidity needs. How much is needed, how often? Keeping these liquidity needs in mind, higher interest accounts (i.e., investments) are less liquid than low-interest accounts (checking).

Work with your community business banker to determine which strategy best meets your business needs, whether it’s a money market account, a certificate of deposit or mutual funds.

With that accomplished, it’s time to build a system that lets you build value in your cash resources and make incremental gains. One tool that can help is a sweep account.

How does a sweep account work?

A sweep account transfers excess funds into the account earning higher interest, usually at the end of the business day. This helps you maximize the interest earned, and over time, it can eliminate the gap of lost opportunity and inflation.

There are a couple of ways in which a sweep account works.

One option is through analysis of the business’s use of checkable deposits. Based on the findings, it automatically transfers (or sweeps) the funds into the account that earns higher interest — typically a money market account. In a business where expenses are dependable and stable, this can be a great option for manufacturers.

Another option is to trigger a sweep with a specific fund balance. If the company checking account reached a certain value, that kicks off a transfer into the higher interest account.

A sweep account isn’t designed to tie up funds when you need it. For example, if the checking account reaches a low balance, that triggers a transfer of cash from the high-interest earning account. So when the cash is needed to pay an unexpected bill or to pay for a larger order of raw materials, the money is easy to access, but without sacrificing the opportunity to earn interest.

A successful business isn’t always about selling more products. Strategic management of resources is an important area of growth. A cash management specialist at Minnwest Bank can provide the expert guidance you need to maximize your reserves while preserving the liquidity you need for day-to-day operations. Find a cash management specialist in your community and make an appointment today.  

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