Cash Management

What is Cash Management?

In banking, cash management is a marketing term for services offered to large business customers or institutions. As a broad term, cash management may be used to describe bank accounts provided to a business or may be used to describe more specific services, including accounting practices.

Cash management is a crucial practice for businesses of all sizes. Tracking expenses and liquidity enables a business (or individual) to appropriately formulate a budget. This step enables a business to ensure them that debt obligations will be fulfilled. If cash management is undertaken in a haphazard manner, the company may be stricken with short-term deficits.

The Basics of Cash Management

As a broad field of practice, cash management can be compartmentalized into a few basic procedures:

Determining Cash Flow: If a business entity’s definition of cash flow is fundamentally flawed they will be impeded from tracking the right figures. In this situation a company may devolve into a cash crisis—illiquidity will spark short-term deficits.

Cash refers to tangible currency and does not include the value of accounts receivable, inventory or other items that can be easily converted into cash. As such, if one subtracts expenses from revenues, they will realize their profit and not their available cash. This simply means that even a profitable business model can face problems if cash is managed poorly.

Cash flow is a term used to define the relationship of how cash moves in and out of a business model. When cash is spent on debt payments, wages, facilities and inventory/materials it is referred to as “outflow”. When cash comes into the business model, from customers or lenders it is called “inflow.” The basics of cash management stem from balancing the inflow and outflow of cash.

The goal of cash management is to manage the inflow and outflow so that a business always has enough cash reserves to cover all day-to-day--as well emergency or unforeseen--costs.

When a business model has a higher cash inflow than outflow they are said to be experiencing a positive cash flow. Typically, businesses with positive cash flows are deemed financially stable. In turn, if a business has a lower cash inflow than outflow, they will be operating under a negative cash flow. An entity with negative cash flow is forced to borrow funds (exposure to interest) to pay for day-to-day costs.

Components of Cash Management:

Business managers and accountants are typically the parties typically responsible for implementing cash management techniques. These professionals will divide cash management into the following categories:

• Investing Cash Flow: Generated from investments and internally from non-operating activities and expenditures not related to the business formation’s normal operation

• Financing Cash Flow: An aspect of cash management that consists of cashing flowing to and from the entity’s lenders and other external sources

• Operating Cash Flow: Referred to as working capital; this area of cash management consists of cash generated from the company’s sales.

Practicing Sound Cash Management Principles:

Sound cash management involves the following factors:

1. A business executive must understand their company’s cash needs and when, where and how they will arise

2. Cash management professionals will know how to access additional cash when it is needed by the company

3. Cash management professionals will keep positive relationships with financial institutions and sources of cash to better prepare themselves.