What is Cash Management? 

Cash management is the process of managing and optimising the cash flow of a company. It involves monitoring, analysing, and controlling the inflow and outflow of funds within an organisation to ensure that it has enough funds to meet its financial obligations and make necessary investments.

Cash management aims to maximise the availability and usability of cash while minimising the associated costs and risks.

Importance of Cash Management

Effective cash management is crucial for businesses as it ensures sufficient liquidity to meet daily operational needs, pay bills, and invest in growth opportunities.

Ensuring sound cash management practices is the best way to ensure financial stability and make strategic decisions for growth. Fintech solutions today have automated, tech-first offerings that make banking for businesses easier than ever.

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How Does Cash Management Work? 

Step 1: Forecast inflows and outflows of funds and prepare a budget accordingly.

Step 2: Incorporate different cash management strategies like offering discounts to the debtors.

Step 3: Negotiate with the suppliers to enter into the best payment terms with them.

Step 4: Make an investment of funds in short-term and low-risk instruments like government securities or money market funds.

Step 5: Regularly monitor cash balances and review fund management plans. 

What are the 4 Types of Cash Management?

  • Cash Flow from Operating Activities 

In this type of cash management, the cash flow statement shows the cash records that come from the regular activities of the business on a day-to-day basis. It excludes cash flows from investing activities. 

  • Free Cash Flow to Equity

The free cash flow to equity is the cash reserve that is left after the reinvestment of the capital. 

  • Free Cash Flow to the Company 

The free cash flow to a company is the amount of cash derived from operations and is calculated after the payment of depreciation, expenses, and taxes. This is primarily used for financial valuation and determines a company’s profitability. 

  • Net Change in Cash 

This shows the overall change in cash flow from one accounting year to another. 

What are the Functions of Cash Management?

  • Inventory Management 

Inventory management ensures to clear the blockage of any trapped sales which leads to the higher stock-in-hand. As increased stocks in inventory indicate decreased levels of liquidity, by effective fund management, companies can aim to clear out existing stocks which will ensure inflows of cash. 

  • Receivables Management 

Generally, after a credit sale, a company records an entry of sale; however, the payment of the same is often in the pending status. Cash management plays the function of effectively paying all the bills receivables to remove any shortage of liquid cash. 

  • Payables Management 

Payables are the company’s liability when purchasing any items on credit. Sometimes organisations obtain loads from lending institutions or banks and are liable to repay within a stipulated time. Hence, effective fund management ensures that the repayment is made on time, avoiding any penalties or compensatory interest. 

  • Short-Term Investment 

The primary essence of cash management revolves around factors like avoidance of cash crunch and insolvency. Moreover, this can also be used to invest in shorter-term instruments like government securities to increase the value of money.  

What are the Objectives of Cash Management? 

  • Cash Flow Management 

The primary objective of cash management is controlling cash inflows and outflows. Most importantly, this approach ensures a lower fund outflow and enhances inflow, promoting an optimistic financial position of a company. Cash management identifies all the sources of cash outflows and adopts measures to restrict them; thereby reducing operational expenses. 

  • Effective Planning of Future Funds 

It optimises cash in a way that makes future cash reserves meet short-term obligations. This also assists in planning better capital expenditure and assessing financial ratios of debt and equity. In other words, with effective planning the company will also have sufficient reserves of liquid cash for catering to any unforeseen expenses. 

  • Meet the Requirement of Unexpected Expenses 

One of the primary objectives of keeping enough liquid cash through effective cash management is catering to unexpected expenses. This may include the breakdown of machinery or any other uncalled occurrence for which the company should not fall out of surplus cash. 

  • Avoid Insolvency 

Ineffective cash management may result in a shortage of funds which may result in failure in bill payment. This, in turn, may lead to insolvency and demolish the goodwill of that organisation. 

7 Ways to Improve Cash Management 

  • Lower the credit period by managing receivables through optimization of the billing and collection process. 
  • Enhance the cash inflows by entering into lucrative negotiations with the suppliers.
  • Curtail traditional payment processes and incorporate different online payment systems. 
  • Carry periodic reviews and update cash management processes and policies to ensure their effectiveness. 
  • Schedule regular auditing of cash management to allocate areas of improvement and adhere to all the necessary compliances. 
  • Reduce cash outflows by locating unnecessary expenses and monitoring them.
  • Incorporate better cash management tactics to make the cash balances and transactions visible. 

What are the Basic Principles of Cash Management?

  • Expedite Process of Cash Receivables 

One of the basic principles of cash management is to monitor and accelerate the cash receivables margin. This can be done by providing reminders to the customers and other parties to pay their bills which is again encouraged by offering lucrative discounts or rebates. 

  • Maintaining Lower Inventory Levels 

A company is said to be in a financially healthy position if enough cash is not trapped in the form of high inventory. Effective cash management aims at lowering this inventory and initiating sales by incorporating different sales. 

Top 5 Cash Management Strategies 

  • Budgeting and Forecasting 

Budgeting and forecasting is a cash management strategy where a company forecasts the different sources of cash inflows. Based on this forecasting the accounts department creates a budget which is used to manage operations and meet any potential shortfalls. 

  • Negotiating Favourable Terms of Payment 

During entering into a contract, the business needs to negotiate terms of payment for better management of cash flows into the company. Moreover, establishing proper strategies like if customers make an early payment, they will get some percentage of discounts. 

  • Establishing Better Collection and Billing Methods

Incorporating the best collection and billing method in a company is an optimistic way of cash management. Simpler and hassle-free processes like online payment gateways will be incorporated, which will lead to ease in paying the credit. 

  • Lowering Expenses 

Being one of the most essential cash management strategies, companies need to identify unnecessary expenses and reduce them to conserve cash. For example, implementing different cost-cutting policies and entering into better negotiations with the clients can control expenses to a significant level. 

  • Keeping Sufficient Cash Reserves 

Maintaining an additional stash of sufficient cash can save you from unexpected expenses and emergencies. Moreover, these cash reserves can be used for the compensation needed to pay for any unfortunate events. 

Advantages of Cash Management 

  • Identification of cash theft or shortage
  • Shorten the cycle of working capital
  • Facilitates rewarding clients and debtors who clear payment on time or before
  • Bolsters other organisational activities and make a short-term investment in machinery or technology
  • Enhance cash profits from unexpected sales or receiving the amount of credit 

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What is the difference between bookkeeping and cash management?

Bookkeeping involves systematic records of financial transactions of a company under different classes. Whereas, cash management only deals with the identification of cash inflows and outflows of a company for a specific accounting period and incorporating strategies for better utilisation of cash.

What is the effect of cash management on working capital?

Any movement in working capital has a direct impact on the cash management of a company. This is because the entry of working capital appears in the cash flow statement. Working capital is the difference between current assets and current liabilities.

What is the importance of cash management?

Cash management is quintessential to maintain the solvency of a company and ensure that the firm never runs out of cash due and can meet any unexpected expenses. Moreover, this approach helps the company to understand the pattern of fund inflows and outflows.


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