Management of Cash

Cash management is the process of collecting and managing cash flows. Cash management can be important for both individuals and companies. In business, it is a key component of a company’s financial stability. For individuals, cash is also essential for financial stability while also usually considered as part of a total wealth portfolio.

Individuals and businesses have a wide range of offerings available across the financial marketplace to help with all types of cash management needs. Banks are typically a primary financial service provider for the custody of cash assets. There are also many different cash management solutions for individuals and businesses seeking to obtain the best return on cash assets or the most efficient use of cash comprehensively.

Cash management is the efficient collection, disbursement, and investment of cash in an organization while maintaining the company’s liquidity. In other words, it is the way in which a particular organization manages its financial operations such as investing cash in different short-term projects, collection of revenues, payment of expenses, and liabilities while ensuring it has sufficient cash available for future use.

What is the definition of cash management? In the real world, organizations have strict cash management controls to monitor its inflows and outflows while retaining a sufficient amount in order to take advantage of attractive investments or handle unforeseen liabilities. Efficient management of cash prevents loss of money due to theft or error in processing transactions. Numerous best practices are adopted to enhance management of company’s funds.

This involves shortening of cash collection periods, regular follow ups for collections, negotiation of favorable terms with suppliers allowing delay in payment periods, and preparation of cash flow forecasts. Businesses also use of technology to speed up cash collection process. They must do all of this while maintaining adequate amount of funds to meet daily operations.

Cash is the primary asset individuals and companies use to pay their obligations on a regular basis. In business, companies have a multitude of cash inflows and outflows that must be prudently managed in order to meet payment obligations, plan for future payments, and maintain adequate business stability. For individuals, maintaining cash balances while also earning a return on idle cash are usually top concerns.

In corporate cash management, also often known as treasury management, business managers, corporate treasurers, and chief financial officers are typically the main individuals responsible for overall cash management strategies, cash related responsibilities, and stability analysis. Many companies may outsource part or all of their cash management responsibilities to different service providers. Regardless, there are several key metrics that are monitored and analyzed by cash management executives on a daily, monthly, quarterly, and annual basis.

The cash flow statement is a central component of corporate cash flow management. While it is often transparently reported to stakeholders on a quarterly basis, parts of it are usually maintained and tracked internally on a daily basis. The cash flow statement comprehensively records all of a business’s cash flows. It includes cash received from accounts receivable, cash paid for accounts payable, cash paid for investing, and cash paid for financing. The bottom line of the cash flow statement reports how much cash a company has readily available.

Example

A computer manufacturing company, Techno Ltd., uses supplier Beta & Co. to purchase its core materials. Beta & Co. has the policy of allowing its customers who buy on credit to pay within 30-days period.

At the moment Techno Ltd. has $20 million cash resources available and has to pay $5 million to Beta & Co. after 30-day period for the purchases. However, after 30-day period Techno Ltd. has an investment opportunity requiring use of the full $20 million cash resources.

If the company is able to renegotiate its terms with suppliers allowing 60-day period, the delay in payment will allow the company to benefit by using current funds for the investment and paying suppliers with cash generated next month from other projects. Thus, by properly managing its funds, Techno can take advantage of investment opportunities while maintaining its operations.

Define Cash Management: Cash management means a company’s ability to allocate its funds efficiently in an effort to cover operating expenses, make investments, repay shareholders, and maintain adequate reserves.

• Cash management is the process of managing cash inflows and outflows.
• There are many cash management considerations and solutions available in the financial marketplace for both individuals and businesses.
• For businesses, the cash flow statement is a central component of cash flow management.