Motivational speaker Natasha Munson beautifully expresses that “Money, like emotions, is something you must control to keep your life on the right track.” She subtly hints that cash management is integral to success and security.
Everyone reading this is likely to have their personalized version to the above question. And, rightly so, for it is said that Cash is King.
For individuals, cash and its management become an integral part of personal finance. People strive to make necessary cash related decisions and its distribution across expenses, savings and investments.
When it comes to businesses, cash is the primary asset which companies (just like individuals) use to settle debt obligations and for operating expenses such as taxes, employee salaries, inventory purchases, advertising costs, and rents.
Now that we have understood the significance of cash from corporate perspective, it is imperative to understand that companies must manage cash well to maintain adequate business stability.
In this backdrop, we bring to you everything that you must know about cash management.
From business perspective, Cash Management is the process which describes the collection, handling, control, and investment of the organization’s cash and cash equivalents. Simply put, it refers to collection and management of cash flows (inflows and outflows).
The concept of cash management revolves around efficient management of planned expenditures. Having said so, it is focused on operational efficiency as well as process optimisation. Understanding it in simple terms, cash management is all about optimising the flow of money that comes in from customers- some money may go into savings, and other to pay the bills.
It is one of the most vital processes to any organization, key component of a company's and individual’s financial stability and forms the crux of a total wealth portfolio.
It is essential to maintain a sound cash flow position in any company. Adhering to this fact, the most important objective of cash management is to ensure optimum utilization of a company’s liquid resources.
As deciphered, cash management is the process of collecting and managing cash flows. This process is important for both individuals and companies.
In business, cash management is a crucial component of the company's financial stability. Similarly, for individuals, cash is essential for financial stability and is a vital part of a total wealth portfolio.
Besides, cash management is a requisite for all forms of organisations regardless of their type, size, and location. It helps in maximizing profitability by optimizing cash utilization. Besides, it helps in creating provisions for future contingencies such as economic slowdown, bad debts, etc.
The below points shed more light on the importance of cash management from business perspective-
Though cash management is an inevitable part of business organizations, it does come with a few flaws-
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Individuals make use of a number of tools for efficient cash management. Few of them are- Short term instruments like money market instruments and mutual funds, treasury bills, certificate of deposit (CD), checking account, savings account and long-term low-risk savings instrument.
Businesses, on the other hand, aim to follow two basic principles-
The cash flow statement is a key element of corporate cash flow management as it records all of the business cash flows- operating, investing, and financing. Companies also regularly monitor and examine liquidity and solvency ratios within cash management.
Interestingly, several companies opt to outsource part or all of their cash management responsibilities to service providers, who report to the company on a daily, monthly, quarterly, or/and annual basis.
Business managers, corporate treasurers, as well as chief financial officers are ideally the key individuals accountable for general cash management strategies, cash-related commitments, and stability analysis.
Let us cast an eye over the key tasks that a cash manager performs-
Quite naturally, different types of companies have very different needs for cash management activities. However, the importance of this process is equally vital across companies and sectors. Let us look at a few sectors and understand how they ideally practice cash management.
Managing cash is a contemplative process and necessitates a lot of analytical thinking. However, one should understand that though cash management helps solve problems pertaining to the deficiency in working capital, it is not a substitute for profit and loss statements.
In closing, we provide a few ideas that businesses can adhere by to ensure effective cash management-