The Definitive Guide to Cash Management for Companies

This article will serve as a comprehensive guide to cash management for companies, from budgeting and forecasting to tracking and investing.

What is cash management and why is it important?

Cash management is the day-to-day administration of managing cash inflows and outflows. The ultimate goal of cash management is to maximize liquidity and minimize the opportunity costs of funds. Cash management is the process of efficient and effective use of cash to meet a company's financial needs. It involves planning, forecasting, and monitoring cash flow to ensure that a business has enough money on hand to meet its short-term obligations, while also investing in long-term growth opportunities. A company's financial stability and future growth is largely dependent on how well it manages its cash.

Maintaining ready cash balances is a key component to deal with unforeseen expenses. Reserving cash balances is crucial when firms anticipate the cost of capital will be higher. Maintaining cash reserves can also help a company take advantage of opportunities when they arise, such as buying securities at a lower price or getting an early payment discount.

Cash Flow: How to Keep the Money Flowing

A business needs cash to meet everyday expenses and avoid debt, which gives creditors a say in how the company is run. Without enough cash, a company cannot pay suppliers, buy raw materials, or invest. Cash is the primary asset used to make regular payments. Managing company cash inflows and outflows lets a business plan for future payments, meet current payment obligations, and maintain adequate stability to support day-to-day operations, growth, and expansion. 

Cash flow is tied to business activities (operations, investments, financing), and improving cash management can be done by better managing accounts like receivables, payables, inventories and others.

Intuitively, cashflow is simply the money that goes in and out of a business, but in reality is a bit more complex. There are three types of cash flow: operating,investing and financing. Operating cash flow is the cash generated from day-to-day operations, while investing cash flow is used to finance long-term projects or assets, and finally financing cash flow is that that comes from external sources.  

Businesses that have poor cash flow management can fall behind in debt and monthly operational expenses, making it extremely hard to recoup stability. Good cash flow management includes measuring liquidity and developing a cash flow projection.

If you need help planning your liquidity, you should download our Excel template Template: 13-week liquidity planning . With it you can determine what sales and profits you need to plan in a certain period of time in order to run your business successfully

The basic components of cash management

There are four basic elements of cash management: budgeting, forecasting, controlling, and investing. Let's take a closer look at each one:

Budgeting: The process of creating a plan to spend and save money according to business needs.

Forecasting: Estimating future cash needs based on past performance and current trends. 

Controlling: Monitoring actual cash inflows and outflows to compare against the budget and forecast. 

Investing: Using surplus cash to earn a return or finance long-term projects or assets.

Budgeting is the starting point for any cash management strategy. A company needs to know how much money it has coming in and going out on a regular basis in order to make informed decisions about where to allocate its resources. Forecasting is the process of estimating future cash needs based on past performance and current trends. This information can be used to make decisions about how much cash to keep on hand and where to invest any surplus funds. Controlling actual cash inflows and outflows is essential to ensure that a company is sticking to its budget and achieving its desired financial results. Finally, investing surplus cash is a good way to earn a return or finance long-term projects.

The importance of Budgeting

Budgeting is the process of creating a plan to spend and save money. This helps businesses make informed decisions about where to allocate their resources. A well-crafted budget can improve cash flow by highlighting areas where money is being wasted or where cuts can be made. 

The first step in budgeting is to track all income and expenses. This can be done manually or with software. Once all transactions have been recorded, businesses need to categorize them into categories. After categorizing expenses, businesses will have a clear picture of where their money is going and can begin to make informed decisions about where to cut costs.

The importance of forecasting 

Forecasting is a critical component of cash management because it allows businesses to anticipate future cash needs and make informed decisions about how to allocate their resources. Without a forecast, businesses may find themselves short on cash when they need it most. A good forecast will take into account past performance, current trends, and expected future events. It should also be updated on a regular basis to ensure that it remains accurate.

There are several methods that businesses can use to forecast cash flow, including trend analysis, regression analysis, and time-series analysis. Trend analysis is a good method for businesses that have a limited history of data to work with. Regression analysis is a more complex method that can be used to identify relationships between different factors and forecast cash flow. Time-series analysis is a statistical method that can be used to predict future cash flow based on past data.

Businesses should also keep in mind that forecasting is not an exact science, and there will always be some degree of uncertainty involved. However, by using a combination of these methods, businesses can gain a better understanding of their cash flow situation and make more informed decisions about how to allocate their resources.

The importance of tracking cash inflows and outflows

Tracking actual cash inflows and outflows is essential to ensure that a company is sticking to its budget and achieving its desired financial results. This information can be used to identify areas where a company is overspending or underspending and make adjustments accordingly. Controlling can also help businesses to identify trends in their cash flow and make better-informed decisions about where to allocate their resources.

There are a number of different ways to track cash flow, including using accounting software, spreadsheets, or manually tracking payments and receipts. Whichever method a business chooses, it is important to ensure that the data is accurate and up to date.

Fundamental requirements for efficient cash management 

There are certain fundamental requirements for efficient cash management, including control over receivables and payables and visibility on cash positions. To address these needs of corporate customers, banks widely offer cash management services comprising the following:

Account reconciliation

Account reconciliation is the process of managing cheques or wires, monitoring their clearance, and keeping track of the true cash balance. Banks and other finance SaaS companies offer account reconcilement services wherein corporate customers can upload details about the cheques or wires issued on a daily basis. At the end of the month, the bank statement shows information on cheques and wires which have been cleared and those which have not. This system is also helpful in the process known as ‘positive pay’, used by banks to prevent cheques from being fraudulently cashed if they are not on the list.

Cash concentration

Cash concentration is a quick and cost-effective method of moving funds from different accounts spread across the country to a single monitored and managed account. This makes controlling easier and payments easier to execute. 

Liquidity management or liquidity planning

Planning and forecasting cash needs, or liquidity management, is crucial for managing short-term borrowings and other aspects of cash flow in an efficient way. This will ensure that if and when such needs arise, they can be met.

Cash Pooling

It is especially hard to invest money short-term when interest rates are low. Taking out loans for shorter periods of time becomes more expensive when rates are high. For reasons of cost and transparency, many companies pool their internal liquidity through cash management solutions . This creates an opportunity for balancing liquidity internally and optimizes financing from within the company. There are different types of cash pools. The most common one is called "zero balancing" where accounts attached to the pool evening out at the end of each day.

Working Capital Management

Working Capital Management is the process of managing a company's short-term assets and liabilities to optimize its cash flow and liquidity. The goal of working capital management is to ensure that a company has enough cash on hand to meet its short-term obligations, while also investing in long-term growth opportunities.

There are several key components to effective working capital management:

Accounts receivable: This is money that is owed to a company by its customers. To effectively manage accounts receivable, businesses need to have systems in place to track invoices and payments, and follow up on late payments.

Accounts payable: This is money that a company owes to its suppliers. To effectively manage accounts payable, businesses need to have systems in place to track invoices and payments, and to negotiate payment terms with suppliers.

Inventory: This is the raw materials, finished goods, and components that a company has on hand. To effectively manage inventory, businesses need to have systems in place to track inventory levels, and to forecast future inventory needs.

Creatively managing working capital can enhance your short term liquidity, for example, reducing receivables by contacting your customers and asking them to pay earlier means the company gets actual cash earlier. The opposite is true, having more payables, means the cash leaves the company later, however this entails risk: payables are effectively debt, and being unable to pay might cause the company to lose important stakeholders like suppliers and risk bankruptcy. 

Is there a difference between cash management and treasury management?

The terms "Cash Management" and "Treasury Management" are both used to describe certain services related to cash flow in the banking industry. Though they are often used interchangeably, Treasury Management actually encompasses a much wider range of activities, including a company's funding and investment decisions. When finance professionals discuss services typically referred to as "cash management," they usually mean things like wire transfers, sweep accounts, merchant services, or business credit options.

Managing Cash flows during a business crisis

A business crisis is a situation that poses a threat to the continued existence of a company. A crisis can be caused by a variety of factors, including natural disasters, economic downturns, political instability, or even scandals.

During the Corona virus, the liquidity of many companies was affected. When companies encountered unexpected short-time work or other financial challenges, they had to react quickly. In our articleCOVID-19: Recommendations for short-term liquidity protection, we present recommendations for short-term liquidity protection for young companies and start-ups.

A business crisis can have a serious impact on your company's cash flow. To effectively manage your company's cash flow during a crisis, you need to take a proactive approach. This means being prepared in advance, and having a plan in place to deal with the potential impact of the crisis on your cash flow. 

The first step in managing a business crisis is to identify the potential risks that could trigger a crisis. Once these risks have been identified, businesses can develop plans to mitigate them. These plans should include contingencies for how to respond to various aspects of a crisis, such as customer flight, supplier disruptions, workforce reductions, and financial instability.

Restructuring / Reorganisation

The goal of restructuring is to improve a company's financial performance by making changes to its capital structure, business operations, or both. Restructuring can involve a number of different activities, such as asset sales, spin-offs, divestitures, mergers and acquisitions, and joint ventures.

Cash management in the age of technology

Cash management solutions have been around for a while now, but there is still room for further innovation. Technology has ushered in an era of cash management optimisation for corporate customers. App-based platforms and SaaS make it possible to centralise cash management processes, online banking and straight-through processing (STP) help speed up payments, and 360 degree views of accounts offer greater visibility into businesses' cash position - ultimately helping them improve forecasting ability and optimize their overall cash flow.

Tips for managing your company's cash inflows, outflows and  financial progress:

Developing methods to improve your company is fundamental for ensuring financial stability and long-term growth. There are a number of different methods that can be used to improve your company's cash inflows and outflows, and the best approach will vary depending on your specific needs. However, some general tips that can help you to effectively manage your company's cash flow include:

Monitor your cash flow regularly: This will help you to identify any potential problems early on, and take corrective action before they become serious.

Create a budget: A budget is a tool that can be used to track actual results against desired outcomes. It can also be used to develop and track spending plans.

Develop a cash management plan: This should include strategies for managing accounts receivable, accounts payable, and inventory.

Implement financial controls: Financial controls help to ensure that money is being spent in accordance with the budget and cash management plan.

Monitor your bank balances: This will help you to identify any potential problems with your account, and take corrective action before they become serious.

By collecting data, companies can quickly identify liquidity deficits and surpluses throughout the entire organization. Based on this analysis, the company's liquidity management can then be optimized. This includes any measures of short-term financial disposition such as solutions to cover deficits and profitably invest surpluses. Professional Control of Payment Flows Often, the growth of a company is accompanied by the establishment of new branches. When new locations are locally

Conclusion on cash management

Effective cash management is essential for businesses of all sizes. By understanding the key components of cash management, and implementing best practices, businesses can improve their financial performance, and better withstand unexpected challenges.

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