Cash management, as the name implies, is the most efficient use of cash to ensure maximum liquidity and profit. It relates to the gathering, disbursement, and investment of funds in a correct manner. The right use of cash ensures the viability of a small business. As a result, cash management is an important company function that oversees the gathering and use of cash.


Importance of cash management

A ‘no cash situation’ in our daily life can be a nightmare, but it can be disastrous for a business. It can lead to a point of no return, especially for small firms. It tarnishes the company’s reputation and may result in its closure.

As a result, managing cash is the most critical duty for business owners. Management must guarantee that there is enough cash on hand to cover present obligations while also ensuring that no funds are idle. This is critical since businesses rely on receivables recovery. A bad debt (irrecoverable debt) can put a company’s financial flow in danger. As a result, cash management entails being careful and making adequate provisions for unforeseen events such as bad debts, economic downturn, and so on.


 Functions of Cash management

  • An ideal situation would be for an organization’s cash inflows to meet its cash outflows. Account receivables make up the majority of cash inflows, while account payables make up the majority of cash outflows.
  • In practise, whereas financial outflows such as payments to suppliers, operational expenses, and payments to authorities are rather predictable, cash inflows are more difficult to predict. As a result, the following functions of cash management can be explained:
  • Inventory management

Stock on hand is higher, which means blocked sales and reduced liquidity. As a result, a firm must strive for speedier stock out in order to maintain cash flow.

  • Receivables Management is another function of Cash management

For its sales, a company generates invoices. The credit time for obtaining the money in these circumstances can range from 30 to 90 days. The sales have been registered, but the organisation has not yet received payment for the transactions. To minimise a financial crunch, the cash management function will ensure speedier receivables recovery.

The company will have enough cash on hand to make its obligations if the average time for recovery is shorter. Payments made on time save the organisation money in the form of interest and penalties. Receivables management also includes a robust follow-up system. This will ensure a faster recovery and will also help the company anticipate bad debts and unforeseen events.

  • Payables management

While receivables management is one of the most critical aspects of cash management, payables management is equally significant. Payables are produced when a company makes a credit purchase and must pay for it within a particular time frame.

Banks and financial organisations can provide short-term lending to businesses. However, because these credit facilities come at a cost, a company must ensure that it maintains a strong cash position, which will aid in timely debt repayment.

  • Forecasting

Managers must exercise extreme caution when planning investments since they must account for future contingencies as well as ensure profitability. They must do it by employing effective forecasting and management technologies. The firm’s liquidity is improved when cash inflows and outflows are efficiently controlled.

  • Short-term investments

Cash management’s major goals are to avoid cash shortages, avoid insolvency, and maintain financial stability. However, it is as crucial to prudently invest the additional cash on hand. Idle cash, despite being a liquid asset, generates no rewards. An organisation must assure liquidity and optimal returns while engaging in short-term assets.

As a result, this decision must be made with caution. The quantity of investment must be calculated and determined carefully in this case. Because an organisation cannot invest all of its available funds, discretion is required. Businesses must also set aside funds for eventualities (cash on hand).


Other features

Monitoring bank accounts, managing electronic banking, pooling and netting assets, and so on are all part of cash management. As a result, treasury cash management might be a vital role. Although major corporations use tools to manage this function, small firms must manually monitor it and assure liquidity at all times.

Furthermore, major companies have access to borrowing at competitive rates. This access is not available to small enterprises. As a result, cash management is crucial for them. Even major firms, however, must monitor their systems on a regular basis to avoid bankruptcy.


Also read

Cash Reserve Ratio

Payroll Management -Definition, Importance, Payroll Software and Benefits