What is Cash Management?
Money management can be important for both individuals and companies. In business, it is a key component of a company’s financial strength. For individuals, cash is also important for financial stability and is also commonly viewed as part of the overall wealth portfolio.
Individuals and businesses have a wide range of offerings available in the financial market to help with all types of money management needs. Banks are usually the main providers of financial custody services. There are also many different money management solutions for individuals and businesses looking to get the most value for their money or the most efficient use of money in general.
Understanding Money Management
Cash is the main asset that individuals and companies use to make regular payments on their obligations. In business, companies have many cash inflows and outflows that need to be managed prudently in order to meet payment obligations, plan for future payments, and maintain adequate business stability. For individuals, maintaining cash balances while profiting from unused cash is usually the main concern.
In corporate cash managment jobs, also known as treasury management, business managers, corporate treasurers, and financial directors are typically the primary individuals responsible for overall cash management strategies, cash-related responsibilities, and stability analysis. Many companies may outsource some or all of their cash management responsibilities to different service providers. However, there are a few key metrics that are monitored and reviewed daily, monthly, quarterly, and annually by the heads of the cash management department.
While it often reports transparently to stakeholders on a quarterly basis, parts of it are typically maintained and monitored internally on a daily basis. The cash flow statement comprehensively records all the cash flows of a business. It includes cash received from receivables, cash paid against accounts payable, cash paid for investments and cash paid for financing. The bottom line of the cash flow statement indicates how much cash the company has on hand.
Cash flow statement
The cash flow statement is divided into three parts: operating, investment and financial. The operating side of cash transactions will vary greatly depending on the net working capital, which is reflected in the cash flow statement as the company’s current assets less current liabilities. The other two sections of the cash flow statement are somewhat more straightforward and describe cash inflows and outflows related to investments and financing.
There are many internal controls used to manage and ensure efficient cash flows from a business. Some of the most important factors affecting a company’s cash flow include the average length of receivables, collection processes, write-offs of outstanding receivables, liquidity and rates of return on cash equivalent investments, credit line management and available operating cash levels. In general, operating cash flows will be largely concentrated in working capital, which is affected by changes in receivables and payable. Investment and financing cash flows typically represent extraordinary cash events requiring special procedures for funds.
The working capital of a company is the result of its current assets minus current liabilities. Working capital balances are an important part of cash flow management as they show the amount of working assets that a company has to cover its current liabilities. Companies tend to have balances of current assets in excess of current liabilities. If current liabilities exceed current assets, a company will likely need to access its reserves to pay off accounts payable.
In general, working capital includes the following:
Current assets: cash, accounts receivable up to one year, inventory items.
Current liabilities: all accounts payable maturing within one year, payments on short-term debt maturing within one year.
Current assets minus current liabilities constitute working capital. In the cash flow statement, companies usually report the change in working capital from one reporting period to the next in the operating section of the cash flow statement. If the net change in working capital is positive, the company has increased its current assets available to cover current liabilities, which increases the total amount of cash in net income. If the net change in working capital is negative, the company has increased its current liabilities, which reduces its ability to pay them as efficiently. A negative net change in working capital reduces the total cash profit.
A company can do several things to improve the efficiency of both receivables and payables, which will ultimately lead to increased working capital and better operating cash flow. Invoicing companies can reduce the number of payment days or offer discounts for fast payments. They may also use technologies that make payments easier and faster, such as automatic billing and electronic payments. Advanced accounts payable management technologies can also be helpful. Companies can choose to pay bills automatically or use direct payroll deposits to increase the cost effectiveness of accounts payable.
Along with internal controls, companies also regularly monitor and review liquidity and solvency ratios as part of their cash managment jobs. External stakeholders consider these ratios important for various analysis purposes as well.