Cash Management: Simply put, cash management is the management and collection of cash flows. It is also sometimes known as monetary logistics management. This process is relevant to both organizations as well as individuals. Cash management is especially essential for organizations (such as companies). In fact, cash management may be considered a critical component of the financial stability of any company.

For a company, cash management is the method by which the company chooses to manage financial operations like the collection of revenue, the investment of capital in short-term or long-term projects, the payment of liabilities as well as operational and other expenses, and the process of making sure that the company possesses enough cash on hand for use in the future. Basically, cash management for a business involves keeping track of cash inflows and outflows and keeping enough cash available for the company’s operational use.

Cash management for individuals will generally involve holding money in financial institutions such as banks, whether it be in savings accounts, checking accounts or other kinds of bank accounts. Another cash management option for individuals is a money market account, which is like a cross between a checking account and a savings account, also offered by banks.

Because banks are FDIC insured, they are perhaps the foremost providers of financial services involving the custody of cash assets. It is much safer to place one’s cash in a bank than under the proverbial mattress. The cash in an individual’s accounts is oftentimes an important indicator of overall wealth and financial stability as well as a part of a complete wealth portfolio.

The Importance of Cash Management

Cash management for individuals generally involves the maintenance of cash balances and the earning of returns on any cash that is idle, oftentimes through the accrual of interest in a bank account. It also involves the prudent management of financial products such as credit cards, which involve obligations that must be paid regularly. Individuals must ensure that they have enough cash on hand to pay their obligations, and they should also seek to invest their idle cash in financial products and services as well as institutions that will offer them a return on their investment. Prudent cash management at the individual level is essential for the maintenance of personal financial stability and prosperity.

Businesses require cash to operate. At any given moment, a particular business may have a number of obligations to pay and a few sources of income. These obligations or expenses generally need to be paid on a regular basis. The income a business receives through the collection of payments (cash inflows) must be balanced with the obligations a business must pay (cash outflows), with enough cash left over to maintain the stability of the business, including its current and future obligations. Thus, the cash a business has on hand, the cash it receives, and the cash it must disburse must all be managed in a prudent fashion so that the business does not default on its payment obligations or run out of the necessary funds to operate.

At the corporate level, cash management, which may also be called treasury management, is usually in the hands of corporate treasurers, business managers, and chief financial officers. These parties are responsible for developing strategies for cash management, monitoring and analyzing the financial stability of the company, and dealing with all cash related matters for the company. A number of businesses may choose to outsource a portion or even all responsibilities related to cash management to service providers which will be dedicated specifically to cash management.

Whether the cash management for a business is kept in house or is sent out to an external financial service provider, the executives responsible for the cash management will keep track of and analyze a number of key metrics on a regular basis (usually daily, monthly, quarterly, and yearly).

The Cash Flow Statement

Corporate cash flow management or treasury management for a company centers around a cash flow statement. This cash flow statement will usually be reported to shareholders or, more generally, stakeholders in the company each quarter, but it will be kept track of and internally maintained daily. This cash flow statement serves as a comprehensive record of all of the cash flows of a business. This includes the cash which is paid to a business for accounts payable, the cash which is received by the business from accounts receivable, the cash which is paid for financing, and the cash which is paid for investing. The cash flow statement can be summed up by its bottom line, which shows the amount of cash that is readily available to the business.

A cash flow statement will be divided into three different sections, operating, financing, and investing. The cash activities recorded in the operating portion will report the current assets subtracted by the current liabilities, the result of which is the net working capital of the business, how much cash the business has to operate. The other two sections are somewhat simpler. The financing section deals with cash inflows and outflows having to do with financing, and the investing section deals with those inflows and outflows having to do with investing.

Techniques for Cash Management

Internal Checks

A company may use any number of internal checks or controls to ensure and manage efficient cash flows. Primary considerations for a company regarding cash flows may include the collection processes for receiving payments, the average length of account receivables, write-offs for receivables which have not been collected, the management of credit lines, the rate of return and liquidity for cash equivalent investing, and the level of available operating cash.

Usually, cash flows that have to do with operating activities are focused heavily on the working capital of a business. This is directly impacted by changes in accounts payable and accounts receivable. Cash inflows and outflows having to do with financing and investing may generally be considered to be cash events that are out of the ordinary and which may involve funding through special procedures.

Working Capital

The working capital of a company is defined as the current assets of the company minus its current liabilities. The working capital balance is a vital part of proper cash management for any business because it demonstrates the amount of the current assets possessed by a company to cover the current liabilities. Businesses aim for their current asset balance to exceed their current liability balance. If the current liability balance exceeds the balance of the current asset, a company will probably need to utilize reserve lines to meet its obligations for accounts payable.

The current assets for a business usually include all of its cash, its inventory, and all its accounts receivable within a year. The current liabilities will generally include all short term debt that must be paid within a year as well as all its accounts payable which are due within a year. Subtract current liabilities from current assets to get the working capital for a business.

The working capital is reported on the cash flow statement in the first section (the operating section), and the change in a company’s working capital from one financial period to the next period is also usually reported. If this net change in the working capital for a company is positive, this means that it has increased the current asset balance to cover its current liability balance, which means a positive gain for the bottom line of the cash flow statement. If there is a negative net change in the working capital of a company, then its current liabilities have increased more than its current assets, which limits the company’s ability to pay those liabilities as efficiently. The bottom line would then see a reduction in the total amount of cash available.

Tips for Cash Management

A company can do a number of different things to improve the efficiency of both its payables as well as its receivables. This will lead to better operating cash flow and an increase in working capital.

In order to improve the efficiency of accounts receivable, a company can offer discounts for the speedy payment of invoices as well as reduce the number of days payable to encourage prompter payments. A company can also offer services such as electronic payment systems and automated billing to facilitate easier and faster payments. Technology that assists with proper cash handling can also be used by a company to eliminate human error and reduce the possibility of theft. These strategies will serve to increase a company’s current assets.

To improve accounts payable efficiency, a company can utilize direct payroll deposits or pay obligations using automated bill payment services in order to increase the efficiency of payables.

Conclusion

Solid cash management practices minimize the potential for the loss of money as a result of human error in the processing of transactions or theft. Technology is oftentimes utilized to speed up the process of collecting cash and to eliminate human error. Proper cash handling is essential for any business to prosper.

Efficient cash management is critical for businesses to survive, to continue operating, and to thrive.