The importance of cash management in business can never be overemphasized. When it comes to controlling the important elements of your business, your cash flow and cash management should be high on your list of priorities. Business cash management is up there with products/services, employees, and customers/clients as the things that need to be controlled.
If your business cash management is poor, this can lead to too much debt or you could completely go bankrupt.
If you do not have any cash management tool as a business, you could eventually go out of business, especially if you run a small business.
Lots of start-ups have fallen victims to complete bankruptcy and eventual failure because they lack a decent cash management system.
The definition of cash management
This is the formal process of collecting, controlling, and investing the total cash of the business in the short term.
This process is a pivotal part of making sure that the company is financially solvent and stable.
While in most formal corporate set-ups, cash management is done by the business manager.
Or corporate treasurers, in your small-scale company, you will have to manage the cash yourself.
Technically, the cash management definition means the daily administration of the management of both cash inflows and outflows.
Since numerous cash transactions are going on every day, this has to be managed.
Above all, the ultimate objective of cash management is to minimize the loss of funds and to take full advantage of corporate liquidity.
If a company lacks an effective cash management routine or there is no tool for monitoring cash closely, the business might find itself in the black.
This will happen because there will not be cash for unforeseen or regular expenses.
A majority of small-scale businesses find it difficult to perform proper cash management and maintain a positive cash flow since they rely on timely payments and sales to finance their operations.
This scenario resembles the financial struggles of a man that is living from paycheck to paycheck, without really having enough cash left to finance other activities.
The importance of cash management to a business
Knowing how to manage cash in the business is as good as sustaining the business itself.
Good cash management is the lifeline of your company.
It is also like maintaining the flow of blood in your body to prevent blood loss and eventual shut down of the body.
Cash management is pivotal to the survival of your company.
Cash is the main asset to pay for your obligations (be it your company or in your personal life).
This has to be managed properly if you take full advantage of your earnings and your revenue.
There are several formal and informal instruments for managing the cash inflows of the company.
While you could practice this on your own by investing in short-term profitable ventures.
You could also approach a formal investment banking institution to see what available options you have to grow the revenue of your company in the short term.
When you are fully in charge of your cash inflows and outflows, you will be able to maintain a positive cash flow for your small-scale company.
We perform cash flow management because they help us have enough cash to operate the company in periods of economic downturns, and/or slow/no business activity.
One good scenario where money management made a difference in companies going bankrupt is during the period of the first wave of the global coronavirus pandemic.
Most businesses could not meet their financial obligations during the lockdown period and eventually go under.
So, if you do not want your company going under faster than the Titanic.
It is essential to begin managing the flow of cash in and out of your company.
Otherwise, any period of no sales or a slight economic downturn could become devastating.
If your company lacks a decent financial management system, it could fall into debt and not be able to meet up with its financial responsibilities.
One direct effect of such a negative event is the inability of your company to procure more goods for sales or pay salaries.
So, most employees will not work with salaries left unpaid.
Cash management: The principle behind it
In most corporate situations, there are different names given to people responsible for managing corporate funds.
These are usually:-
- Corporate treasurers,
- Business managers, and
- Chief financial officers.
Their primary responsibilities include general cash management, the analysis of stable business funding, and other tasks related to the monies associated with the company.
In small scale companies, this role usually goes to the owner of the company or the accounts department.
Moreover, companies may decide to outsource all or parts of their cash management activities to institutions that offer such services.
The primary component of the cash flow management of a company is the cash flow statement.
So, technically, by cash flow statement, we essentially mean the total record of the inflows and the outflows of the company over a certain period.
- cash realized from its business operations/sales,
- cash paid for the benefit of investing for the company,
- and, cash from different activities that needs financing.
The summary of the company cash flow statement indicates whether or not there is cash available for a given company.
Due to Covid-9
It is important to state that during the global shutdown of businesses due to Covid-9, lots of companies/organizations/enterprises/NGOs performed a cash flow analysis to assess their financial standing.
Technically, there are three major components to a cash flow statement.
- Financing, and
- Ongoing operations.
And so, the operational activities of the company are heavily dependent on the total working capital of the company.
This is shown on the cash flow statement as the current assets are taken away from the current liabilities of the company.
To remain afloat, most companies struggle to keep their current assets to become more than their current liabilities.
Investing and financing include the general financing operations of the company.
The financing activities of the company essentially includes both the inflows and outflows which is with the investment and finances of the company which includes:
- Real estate investments,
- New purchases of machinery and equipment,
- Stock repurchases, or
- Payment of dividends of stocks.
The advantages of a cash management system
Most people tend to wonder what are the advantages of the importance of cash management in the business system to their companies or organizations.
There are several of these and they are:-
- Makes it possible for your company to have the cash to fund its recurrent operations.
- You can meet up with your obligations.
- You can plan for your capital expenditure.
- And, you can maximize your business activities.
How to practice effective cash management for your company
The first stages of cash flow management include measuring liquidity.
Liquidity means the state of having enough cash to fund your current financial responsibilities.
This means that you will have to create a cash flow projection.
It is an instrument that allows you to manage cash both in the long term and the short term.
Other parts of this strategy include knowing your historical cash flows and sources of your revenue/income.
Controlling the cash in your company
This is very important if you want to manage both the short- and long-term cash flow of your company.
This makes sure that you cut down on cash shortages by managing outstanding debts.
Tying up your cash in a long-term investment like stocks, there will not be funds to invest in short term opportunities to produce a good ROI.
If your company manages its funds effectively, you create a decent working economic environment for everybody.
The objective of effective cash management for businesses
The biggest goal of decent importance of cash management in business routine is the ability to eliminate or reduce any inability to meet up with financial requirements.
Therefore, if a company effectively manages its monies, it can maximize its operations and minimize the general cost of executing core business functions.
Understanding the components of the cash flow:
An effective cash flow system comes with different important components, which are pivotal to its execution.
The Cash Flow Statement is to show the origins and uses of cash.
This statement is essentially divided into three primary components:
– The operating cash flow
This is technically known as the working capital of the company and is the cash flow that had been made from the internal operations of the company.
This is realized from the services or products of the company.
Since this is internally generated, you can control it.
– The investing cash flow
This is the cash that the company gets internally from its non-operating functions.
So, this comprises investments through machinery, equipment, and plants or other types of fixed assets of the company, or other cash uses/sources out of standard business operations.
– The financing cash flow
This is the cash obtained from and spent on external activities like shareholders, investors, and lender’s payments.
Furthermore, other activities included here include dividend payments, stock issuance, and loan repayments.
However, wise business owners begin their cash flow management by creating a cash flow projection.
Companies that are managed by smart people know to develop cash flow projections for the short term( every week, every month), also the long term (every year or every other year).
This will also, help such organizations to develop a business strategy that will help them meet any needs of their business.