In any organization, the cashflow systemization, stability diagnosis and other money-related activities are handled by the financial personnel, business management and treasurers. This is usually to ensure that there is effective money circulation in that corporation because funds are the priority. In business, it's either you're making profits or incurring losses and am sure nobody wants to be at the latter end.
Therefore the subject of cash management must be thoroughly understood at any level in an organization.
What is cash Management?
Cash management refers to the intake, usage, keeping and investment of funds or equivalent to make sure the companies resources are utilized. Cash management is necessary for corporations and individuals which is why it is the main factor for financial stability. Financial equipment involved includes money market, deposits with certificate and treasury bills.
A cash flow statement is a key to a cash flow system in an organization. It elaborately outlines how money goes in and out of an organization. In summary, the cash flow statement shows the net worth of that organization. The cash flow statement comprises three levels: Financing, investment and operation. The operation level is based on the working capital which can be said to be Assets-Liabilities. Investments and Finance involve outflows and inflows.
Working Capital comprises of;
Current assets: These can also be known as cash. It comprises of accounts received in a day example: inventory
Current liabilities: These comprise accounts that can be paid back within a year. Examples include debt payment that is short-termed.
STRATEGIES FOR CASHFLOW MANAGEMENT
Ensuring that a cash flow system is properly managed involves a lot of work and practical knowledge. After thorough research on the topic, I have come up with five ways organizations handle an effective cash management system.
1. Speedy Collection of Accounts Receivable: The easiest way to grow your cash inflow and generate liquid cash is by collecting debts from debtors on daily basis.
2. Cutting cost: The company must seek out ways to reduce operating costs to maintain a good flow of cash in the system.
3. Monitored cash flow regularly: Closely monitoring the inflows and outflows, making sure the expenses are supervised and cutting down on debts makes for Financial stability.
4. Technology upgrade: Organizations can easily and conveniently monitor and maintain a healthy database and Financial increase from anywhere and at any given time through digital devices.
5. Extension of accounts receivable: Companies should move to extend the payment period of debtors by obtaining from Creditors an extended credit time.
6. Money Market funds: Sometimes when carrying out a business, there can be a surplus. The surplus is usually invested into the money market funds. Then are then converted readily into cash when required and can yield a quality level of profit over time.
7. Cash deposits: When the company has a well structural Financial system, it can predict in terms of the expenses that will be made and the surplus in cash that will be incurred. It can then invest this money in cash deposits. It will definitely yield profits over time but withdrawals must be made as stated.
Major Functions of Cash Management
1. Investing idle cash: Cash management makes it possible to utilize surplus cash for various investment opportunities.
2. Proper planning of cash: cash management is essentially about making plans and taking decisions in terms of utilizing cash at hand for profits.
3. Increasing cash flow: It makes it possible that the company maintains steady inflows and outflows for running the system effectively.
4. Managing cash flows: Cash management ensures that funds are restricted or accelerated for a healthy and effective system.
Reasons for Problems with Cash Management
Many corporations run into several problems with cash due to poor management. Here are several reasons for these problems:
1. Inadequate understanding of the cash flow cycle
Adequate understanding of the inflow and outflows from the business is required such as when to purchase an asset or pay for an account payable. Without this, the company will end up running out of funds because of inventory it over-purchased without the usual inflow for it.
2. Lack of understanding between profits and capital
A business corporation can acquire profits on their income statement but will still burn capital on their cash flow statement because a company that generates revenues does not necessarily mean it has a healthy cash payment on it.
3. Poor cash management skills
This skill comprises the ability to optimize and handling the working capital adequately. It includes discipline and setting up proper systems to make sure receivables and payables are handled properly.
4. Poor capital investments
A business corporation can make investments but will ultimately not generate the needed returns on the investment to balance the cash flow cycle.
Cash management is the bedrock of any business corporation. I'd like to say that cash management requires time and should be performed often. It also needs an expert to perform administrative and consultation stages but in all, it is worth it.