To get through the recent recession, growth and middle market companies were forced to adopt a more disciplined approach to financial management. Nearly four years later, financial discipline has become a way of life for successful companies. CFOs at these companies understand the importance of a strong balance sheet, and that having sufficient cash on hand gives them financial flexibility and improves their ability to respond to an ever-changing marketplace. Maintaining such a strong level of financial discipline over time isn’t easy. As growth increases, and spending and investment needs put pressure on a company’s cash reserves, it becomes more important to manage working capital effectively. From negotiating better payment terms with suppliers to finding new ways of improving their cash flow, CFOs need to lead financial discipline at their companies to ensure they are in a strong financial position, so they’re prepared to compete in today’s unpredictable business environment.
Cash is often referred to as a “non-earning asset.” Cash and cash equivalents swept into liquid investment accounts earns very little return. Cash is needed to fund current operations, provide compensating balances for the banks to maintain favorable credit ratings, to take advantage of vendor and supplier discounts, to fund capital projects and for speculative or emergency needs such as an acquisition of another firm. The amount of cash a company holds should be based on its annual cash budget, which should define the amount required to meet these needs.