Let's start by talking about what cash is. Cash is money in your hand, or in the bank, or something you can exchange more-or-less instantaneously for money in your hand or money in the bank. A valid check counts. A T-bill counts (don't expect to get paid in T-bills often.) Your inventory doesn't count. Your accounts receivable don't count. Your credit card receipts don't count.

You need to know how to handle the cash your business generates – when to expect it coming in, when to expect it going out and what to do with it in between. This means you need to know when big expenses are coming – your quarterly tax bill, your inventory shipments, your annual insurance payments, for example – so you can make sure you've got the money in the bank to pay them.

If you run out of cash when an expense comes, and you can't postpone that payment, you're out of business.

Managing cash is why businesses take out lines of credit from the bank, why businesses have credit cards, why they have bank accounts.

To predict how your cash moves, you will want to be able to produce at least a simple cash flow statement for your business. A cash flow statement breaks down into three sections: Cash flow from operations, cash flow from investing  and cash flow from financing.

Operational cash flow comes from the nuts and bolts of your business – how much cash came in from selling stuff and how much did you spend to cover your operations. Cash flow from investments comes from buying and selling property or securities, and from making loans to your customers. Cash flow from financing comes from taking out or repaying loans or from buying and selling shares in your company. Accounting software and services can be useful for this work. We have partners who can help.

Understanding your cash flow will give you enough time to secure a loan – or manage your corporate savings – if you have a predictable expense coming up.

Cash management tips 

Here are a few tips from the Small Business Administration (SBA) about the actual, physical handling of cash:

The IRS requires that merchants use Form 8300 for such large transactions, which includes the name, address, and social security number of the buyer. The same rule applies to cash equivalents such as traveler's checks, bank drafts, cashier's checks, and money orders.

Some states have laws regulating the kinds of identification customers may be asked to show when writing checks. Requiring a photo ID such as a driver's license is generally legal, but requiring customers to show a credit card as a condition for writing a check is often forbidden.

Creating and adhering to a check policy may help avert legal hassles. Common policies require that checks be written and signed in the presence of the seller, drawn from local banks, not written for more than the purchase price, and various other stipulations.

The Uniform Commercial Code, which governs banking practices in most states, declares that banks may refuse to honor checks dated back six months or more. It's best to cash checks as quickly as possible.