As its name suggests, cash management ensures maximum liquidity and profit from cash. The process involves gathering, disbursing, and investing funds appropriately. An organization’s viability depends on its use of cash. Cash management governs the collection and use of cash at a company, so it is an important function.
It is difficult for many of us to deal with a situation where there is no cash, but it can be devastating for a business. Small organizations may reach a point where they cannot return. Reputation is tarnished and the company may shut down if it conducts business in such a way.
Therefore, managing cash has become the most important duty of business owners. Managers must ensure that they have enough cash on hand in order to satisfy current obligations while also preventing funds from sitting idle. Receivables collection is of critical importance to businesses. It is possible to put a company’s financial flow in danger when it has bad debt (irrecoverable debt). In this way, cash management requires being thoughtful and making provision for unforeseen events, such as bad debt, economic downturns, etc.
The functions of cash management
- Cash inflows should be equal to cash outflows for an organization. Receivables account for most of the cash inflows, while payables account for most of the cash outflows.
- Although cash inflows are more difficult to predict in practice, financial outflows like payments to suppliers, operational expenses, and payments to authorities are much easier to predict. For this reason, cash management is divided into the following functions:
As a result, there are fewer sales and reduced liquidity due to an increased amount of stock on hand. Thus, in order for a company to maintain cash flow, it must increase stockouts.
Cash management also encompasses Receivables Management
Invoices are generated by companies for their sales. If the money is to be obtained in this way, the credit time may vary from 30 to 90 days. Payment for the transactions has not yet been received, despite the sales being registered. It helps minimize financial crunches by accelerating receivables recovery.
The company will have enough cash in hand to pay its obligations in the short term. The organization saves money by avoiding penalties and interest if payments are made on time. An effective follow-up system is also included in receivables management. In addition to benefiting the recovery process, this will help the company anticipate bad debts and unforeseen events.
Management of payables
Payables management is equally important to cash management as receivables management. Companies generate receivables when they make credit purchases and must pay for them within a given period of time.
Businesses can obtain short-term loans from banks and financial institutions. However, it is essential that a company maintain a strong cash position since credit facilities come with a cost, which will enable it to repay its debts on time.
It is essential that managers plan investments with caution since they must account for future contingencies as well as ensure that they are profitable. To this end, forecasting and management technologies must be employed effectively. Inflows and outflows of cash are efficiently controlled to improve the firm’s liquidity.
In cash management, we monitor bank accounts, manage electronic banking, pool and net assets, etc. The treasury cash management department could, therefore, play a crucial role in this respect. Small businesses must monitor this function manually and ensure liquidity at all times, although large corporations use tools to accomplish this task.plish this task.
In addition, large businesses will have access to competitive rates for borrowing. Small businesses will not have this opportunity.es. Cash management is therefore crucial for them. To avoid bankruptcy, even major firms must monitor their systems regularly.