Cash Management

What Is Cash Management?

Cash management is the process of collecting and managing cash flows. Cash management can be important for both individuals and companies. In business, it is a key component of a company’s financial stability. For individuals, cash is also essential for financial stability while also usually considered as part of a total wealth portfolio.

Individuals and businesses have a wide range of offerings available across the financial marketplace to help with all types of cash management needs. Banks are typically a primary financial service provider for the custody of cash assets. There are also many different cash management solutions for individuals and businesses seeking to obtain the best return on cash assets or the most efficient use of cash comprehensively.

Cash management refers to a broad area of finance involving the collection, handling, and usage of cash. It involves assessing market liquidity, cash flow, and investments.

In banking, cash management, or treasury management, is a marketing term for certain services related to cash flow offered primarily to larger business customers. It may be used to describe all bank accounts (such as checking accounts) provided to businesses of a certain size, but it is more often used to describe specific services such as cash concentration, zero balance accounting, and clearing house facilities. Sometimes, private banking customers are given cash management services.

Effective cash management is key for ensuring the financial stability and solvency of a company. It’s especially important for small businesses who have less access to affordable credit and need to make sure the cash they have coming in will cover their costs.

One side of cash management relates to the company’s receivables: any cash that is owed to the company. Companies can improve the timeliness of payment, for example, by establishing clear billing terms with customers and using automated billing services.

The other side of cash management relates to the company’s payables: its staff wages, taxes, dividends, rent, debt payments and other costs. Companies can streamline and automate their payments by using electronic payments and direct payroll deposits.

What Makes up a Company’s Cash?

Cash refers to the entirety of the liquid financial resources available to a company at any given time. The cash a company possesses forms a vital element of its financial management. In fact, it’s the free cash flow that allows a company to pay its expenses, including salaries, suppliers and more. In business, a company’s cash represents the funds that are available to it at any given time.

So, it comprises:

  • Liquid funds available in the till
  • Funds available in the company’s bank account(s)

These funds should be readily available to the company; it can then use them to cover planned or unplanned expenses or to finance projects when an opportunity arises, for example. It is this liquidity that makes it possible for the company to pay its expenses, such as salaries, suppliers and so on.

The cash balance takes into account all money that comes in and goes out and when calculated can show a surplus or a shortfall:

  • If the cash balance shows a surplus, it means that the company has money at its disposal – this is generally a good sign
  • If the cash balance shows a shortfall, it means that the company does not have any money at hand and will be unable to deal with certain situations without, for example, taking out a loan

Take care: analysing a cash balance is rarely this simple and the context needs to be taken into account for each particular company. For example, a cash balance may show a surplus because the company hasn’t paid its supplier invoices yet.

Why is Cash Management Important?

Cash is the primary asset used to pay obligations on a regular basis. Managing company cash inflows and outflows allows a business to meet payment obligations, plan for future payments, and maintain adequate business stability to support the business’ daily operation, growth, and expansion.

There are several key metrics that organizations monitor and analyze on a daily, monthly, quarterly, and annual basis. Daily reviews of cash received from accounts receivable, cash paid for accounts payable, cash paid for investing, and cash paid for financing are tracked and reported to monitor how much cash a company has readily available.

Customized banking products and services can help a business to speed up the collection and deposit of incoming funds, schedule outgoing payments, and report on the movement of funds and account balances. It is important to periodically review the cash flows of the business and the products and services in use to determine if changes are needed.

Understanding Cash Management

In banking, both “Cash Management” and “Treasury Management” are terms for certain services related to cash flow. Though these terms are commonly used interchangeably, the scope of Treasury Management is much larger and includes a company’s funding and investment activities.

When finance professionals discuss services under the “cash management” umbrella, they’re usually referring to services such as wire transfers, sweep accounts, merchant services, and business credit options.

Cash is the primary asset individuals and companies use to pay their obligations on a regular basis. In business, companies have a multitude of cash inflows and outflows that must be prudently managed in order to meet payment obligations, plan for future payments, and maintain adequate business stability. For individuals, maintaining cash balances while also earning a return on idle cash are usually top concerns.

In corporate cash management, also often known as treasury management, business managers, corporate treasurers, and chief financial officers are typically the main individuals responsible for overall cash management strategies, cash-related responsibilities, and stability analysis. Many companies may outsource part or all of their cash management responsibilities to different service providers. Regardless, there are several key metrics that are monitored and analyzed by cash management executives on a daily, monthly, quarterly, and annual basis.

The cash flow statement is a central component of corporate cash flow management. While it is often transparently reported to stakeholders on a quarterly basis, parts of it are usually maintained and tracked internally on a daily basis. The cash flow statement comprehensively records all of a business’s cash flows. It includes cash received from accounts receivable, cash paid for accounts payable, cash paid for investing, and cash paid for financing. The bottom line of the cash flow statement reports how much cash a company has readily available.

What is Cash Management for?

Avoiding the risk of cessation of payments

A company that can no longer settle its short-term debts is a company that is in a situation of cessation of payments. This often means the company’s demise (or, at least, exposes the company to serious problems). Fortunately, managing your company’s cash can save you from finding yourself in a sticky situation. Setting up regular monitoring (by keeping a cash budget up to date, for example) will give you much better visibility of your current cash flows and your forecasts. This will allow you to identify in advance any cash gaps that could damage your finances and then take appropriate action.

Saving money (on overdraft fees, bank commissions and more)

Still not convinced? You should know that good cash management can save a company money on bank charges, such as interest on loans, overdraft fees, bank commissions and so on. For example, a company that uses its unauthorised overdraft will have to pay overdraft fees as well as the associated bank commissions.

If a managing director maintains an overview of their cash effectively, they will be able to determine when they will actually need to finance their cash flow and will have time to put less expensive financing in place.

Making money by allocating cash surpluses cleverly

While cash shortfalls lead to extra costs for a company, poorly placed cash surpluses can be just as problematic.

You should know that banks have wide product ranges for those with surplus cash to allocate, and these products can be aligned with the managing director’s objectives, such as:

  • Allocating the surplus with a view to long-term profit
  • Allocating the surplus with a view to financing an investment
  • Allocating the surplus with a view to having a safety net for unforeseen expenses

However, it is still important to actually know that the company has generated this surplus. And how can we shine a light on this? By using a cash flow plan and closely following its progress.

Cash Management – Who Does What?

Cash management is relevant to every company, but workload and available staff vary from one company to the next. A multinational will have a much larger cash flow to manage than a start-up that’s just getting going, and a small company will have far fewer staff members trained to manage its cash flow than a corporate group.

The role of the managing director

The managing director of a company needs to know the company’s cash situation and measure the impact of their decisions on its profitability and future cash flow, whether these be investments, recruitment or anything else. Good cash management should allow the managing director to make the best decisions for their company, both in the short term and far into the future.

Don’t forget: if the company is small and doesn’t have a dedicated finance team, it’s the managing director that will fulfil all of the roles described below!

The role of the finance director

The finance director manages the company’s finance team and reports to the managing director. From a cash management perspective, their role is to monitor key indicators reliably and in real time so that they can make the managing director aware of any cash flow issues and advise on decisions to be taken and actions to implement.

The role of the treasurer

The treasurer manages the cash flow from one day to the next. They are responsible for monitoring cash flows, preparing forecasts, analysing a variety of key indicators, managing relationships with banks, organising validation and much more. Their role is essential because they have an overview of the company’s liquidity and profitability.

The role of the accountant

In general, accounting is said to be an analysis of past events, whereas a treasurer’s activities look at the future. If a company doesn’t have a treasurer, the accountant will be responsible for cash management. If there is a treasurer, they will instead be responsible for providing the required data, such as invoices, balance sheets, income statements and so on.

The role of the management accountant

The management accountant’s role in cash management is to take responsibility for the budgets for each of the company’s activities or services offered. They provide the information needed to draw up the cash flow forecast.

What Does Working Capital Include?

Generally, working capital includes the following:

1. Current assets

  • Cash
  • Accounts receivable within one year
  • Inventory

2. Current liabilities

  • Accounts payable due within a year
  • Short-term debt payments due within one year

On the cash flow statement, organizations 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, an enterprise’s increased its current assets available to cover current liabilities.

If a net change in working capital is negative, an enterprise’s increased its current liabilities, which reduces its ability to pay the liabilities efficiently. A negative net change in working capital lowers the total cash on the bottom line as well.

Causes of Problems with Cash Management

Unfortunately, many businesses engage in poor cash management, and there are several reasons for the problem. Let us look at some of them:

1. Poor understanding of the cash flow cycle

Business management should clearly understand the timing of cash inflows and outflows from the entity, such as when to pay for accounts payable and purchase inventory. During rapid growth, a company can end up running out of money because of over-purchasing inventory, yet not receiving payment for it.

2. Lack of understanding of profit versus cash

A company can generate profits on its income statement and be burning cash on the cash flow statement.

When a company generates revenue, it does not necessarily mean it already received cash payment for that revenue. So, a very fast-growing business that requires a lot of inventory may be generating lots of revenue but not receiving positive cash flows on it.

3. Lack of cash management skills

It is crucial for managers to acquire the necessary skills despite the understanding of the abovementioned issues. The skills involve the ability to optimize and manage the working capital. It can include discipline and putting the proper frameworks in place to ensure the receivables are collected on time and that payables are not paid more quickly than is needed.

4. Bad capital investments

A company may allocate capital to projects that ultimately do not generate sufficient return on investment or sufficient cash flows to justify the investments. If such is the case, the investments will be a net drain on the cash flow statement, and eventually, on the company’s cash balance.

Basic Principles of Cash Management

Below are the different principles:

1. Maintaining lower inventory levels: Keeping a more significant inventory level can often lead to a scenario where cash gets unnecessarily stuck. Even the warehouse space gets occupied unnecessarily. Companies must come up with appropriate techniques and strategies to be able to maintain lower levels of inventory successfully.

2. Speeding up the process of cash receivables: The companies must encourage their clients and customers to pay their dues quicker and offer them lucrative discounts and other schemes that motivate them to pay as early as possible.

Cash Management Strategies

The strategies for cash management are:

  • One must always ask for a milestone or deposit payment
  • The customers must be encouraged to clear their bills faster
  • One must always ensure the expenses are always bare minimum or even delayed.
  • One must request the vendors to modify their payment terms
  • Finance and fulfill purchase orders
  • Idle equipment must be put for sale or on lease
  • Boost profit margins
  • Invoice factoring/ invoice discounting/ invoice financing/ sale invoices.

Different Types of Cash Management Tools

Following are the different types as given below:

  • Short-term instruments include money market instruments and mutual funds, Treasury Bills, certificates of deposit (CD), etc.
  • Checking account
  • Savings account
  • Long-term low-risk savings instrument

Limitations of Cash Management

The limitations are as follows:

  • Cash management ignores the accrual concept of accounting
  • It is historical in nature; that is; it rearranges the current information provided in the profit and loss statement and the balance sheet.
  • It is not a substitute for a profit and loss statement.
  • It ignores non-cash transactions.

Advantages and Disadvantages

Following are the advantages and disadvantages as given below:


The advantages listed below are as follows

  • Cash management allows estimating the cash profits and not just profits from outstanding incomes and credit sales.
  • It helps in detecting cash embezzlement.
  • It allows for speeding up the working capital cycle.
  • It helps in rewarding such debtors that make quicker payments.
  • It speeds up the operations of an organization.


The disadvantages listed below are as follows.

  • Management of cash requires the specified skills of the person managing it.
  • It is a time-consuming process.