Cash management: what it is and how it is applied in the company

One of the many responsibilities corporations have is to plan how they will use their cash.

With this article we can discover how this function is carried out, what they are the factors that are taken into account to make cash management as efficient as possible and the principles that no company should forget if it wants to be optimal in this task.

What is cash management?

Cash management, also known by its English name, cash management, refers to all the measures that a company takes to manage the inflows and outflows of money in order to maintain an optimal financial state. To achieve this goal, the organization must keep an exhaustive control of the liquidity it has at all times, the payments it must make as well as the financing possibilities it can obtain from the banks.

The purpose of cash management is ensure that the entity has the necessary funds to be able to face the liabilities it has in each year and at the same time make the most efficient use of the surplus, if any, in order to maximize the benefits of the investment. To do this, it has to achieve a balance between the part that uses to settle debts, pay pending bills, another part that is held in cash and another that is reinvested.

For all these issues, it is essential to have a treasurer who is capable of carrying out the appropriate procedures and who controls the inflows and outflows of money so that the company’s account statement is always adequate and situations that may compromise are not reached. the stability of the organization, because if there are problems at the financial level, they will inevitably affect all other facets of the company.

They may seem like obvious statements but sometimes they are not so obvious. The importance of proper cash management should not be underestimated. A study that looked at why 101 startups had failed showed that the main cause, affecting 41 of them, was running out of cash. A demonstration of how Financial mismanagement can quickly bankrupt the company.

Obviously, if a company runs out of cash, it also indicates that there are problems in other dimensions of the company or that some element is not developing as planned. In any case, it is more than enough reason to carry out an impeccable cash management, either not to generate new problems or to be solid enough to be able to solve others that were generated in other departments.

Although it may seem that all the issues we have mentioned are simply about company accounting, they are about different concepts. It is possible that if the company is not large, both procedures are carried out by the same department, but the larger the corporation in question, the more likely it is that they have specialized one team for accounting and another for cash management .

How to properly manage cash

Once we know the importance of cash management, the question is what is the best way to do it. Although, as in everything related to the economy, there are no magic formulas, there are questions that in many cases respond to common sense. Let’s see some of them in more detail.

1. Shared responsibility between departments

A priori it might seem that everything related to cash management should be managed solely from the finance department, but in reality it is such an important issue that applies to many other sectors of the company.

For example, the commercial department has a much deeper knowledge of the different clients it works with as well as a closer relationship with them, in some cases. Therefore, it would be reasonable to consider the possibility that it is the commercial in charge of a client who has pending payments with our company, who is in charge of contacting him and making him see the situation in which he is, thus trying to resolve the incident as soon as possible and that the company receives the amount owed so that cash management is not compromised for longer.

2. Pay providers on time

In the previous point we have given the example of a client of our company who has been late in a payment and therefore has a debt with us. But do not forget that the opposite case is also a common scenario in the business world. That is to say, frequently it is the company itself that delays the payment of invoices to its suppliers, for certain reasons. One of them is supposedly to take care of cash management.

Although that is the objective, this practice is nefarious. Using providers as if they were financial entities that give us credit when we need it is a mistake. In terms of reputation, it will seriously affect us, as it will be difficult to collaborate with the same supplier in the long term if the reputation of our company is that it pays out of time. This practice is sometimes used before quarterly or annual account closings because liquidity is anticipated to be needed.

Likewise, it is not excusable. If that is the case, the best thing will be to previously agree with the supplier a payment date that the company knows it can assume. In addition, we could be seriously deteriorating the cash management of the supplier company, since it is money that they expected and that they are ceasing to receive, weakening their accounts, sometimes seriously, if the order placed is important and it is a small company.

3. Explore different forms of financing

Another way to take care of cash management is to evaluate forms of financing beyond the classic bank loans, which are the mechanisms that are usually used and that generate high costs for the company. For example, To balance accounts when there are many outstanding customer collections, large corporations are turning to so-called collection companies.

These companies advance to the original company almost all of the debt that the third party has with them and is in charge of managing the collection of the pending invoice with said client, keeping a commission for the work carried out. It is a relationship in which both companies are favored, which is a perfect mechanism for managing cash, which sees how the flow of money is not being put at risk due to defaults.

4. Review immobilized cash

Another of the tactics we can use to optimize cash management is the exhaustive review of the balance sheets in search of possible cash that is immobilized. In this sense we can find, for example, income accrued because we have sold our products or provided our services to certain clients and they have not yet been invoiced, for whatever reasons.

Likewise, we can find ourselves in the opposite position and we are the ones who have paid in advance the payment to a provider and we have not yet been able to enjoy the elements that should be served to us. In both cases, it is the job of the person responsible for cash management to control these cases in order to always be in the most efficient situation possible.

Objectives of cash management

We have already seen what cash management consists of and different ways to do it correctly. We are now going to see different functions that this process fulfills.

1. Be able to afford the payments

Obviously, the first and probably most important issue that we will be able to control with proper cash management is face the payments that our company must make, from those that correspond to their own employees as well as those of suppliers and other types of expenses.

2. Make spending forecasts

It is not only about making payments but also about planning them and knowing how much we can spend at all times, preparing forecasts for the year based on the capital we have or expect to have.

3. Cope with unforeseen expenses

Of course, as much as we try to plan everything, there are times when unforeseen situations appear that cause expenses that we did not have. In these cases, good cash management will allow us to deal with these events more easily.

4. Make good investments

If the economic situation of the company is very good, it is possible that it has surpluses available to invest. Correct cash management implies choose the best options to spend that money on.

5. Manage funds efficiently

The balance between income and expenses is the backbone of a company’s accounting, and for this it is essential to manage the funds we have in the best possible way.

6. Never go bankrupt

Of course, insolvency is a scenario that the company should not reach, as it is the prelude to bankruptcy.

Bibliographic references:

  • Gitman, LJ (2003). Principles of financial management. Pearson Education.
  • Kusnadi, Y., Wei, KCJ (2011). The determinants of corporate cash management policies: Evidence from around the world. Journal of Corporate Finance. Elsevier.
  • Laitinen, EK, Laitinen, T. (1998). Cash management behavior and failure prediction. Journal of Business Finance & Accounting. Wiley Online Library.
  • Pérez, KD, Socarrás, F., Labrada, ED (2014). Methodological procedures for cash management. Observatory of the Latin American Economy. Servicios Académicos Intercontinentales SL.


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