The Importance of Cash Management for Business

Cash management is simply defined as working capital. It was designed to assist and ensure that adequate levels of cash are readily available to fulfil a business’s short-term needs such as inventory purchases (Bryant, 2018). However, it also has a much bigger job. It is the difference between cash flow and cash accounts. Taking a closer look, we find that cash flow is the capital or cash that is moving in and out of a business (Murray, 2017). This can often appear to be more movement out than in especially in the first several years of a new business but if there is no in there really cannot be any out. These activities of cash flow are considered positive activities. However, cash accounts, which are still positive, are assets of high liquidity and low profitability. This makes them a negative activity in relation to a cash flow (Cornett, Adair, JR, & Nofsinger, 2018). Ultimately, the management of cash known most commonly as cash management is a broad term that is used to encompass all areas of cash. These areas include but are not limited to collection and disbursements and cash concentration. The ultimate goal is to manage all cash flows in such a way that it maximizes the availability of cash so that it is not held up in assets, inventories or investments making is difficult to access quickly.

Collection and Disbursements

Collection systems are used as a means of reducing the length of time it takes to receive cash from individuals or other organizations that owe the organization. There are three areas of the collection process that should be taken into consideration that are often overlooked. These are referred to as collection floats. These floats can cause an organization to struggle in managing collections and cash management if not evaluated appropriately. Areas like mail systems (internal and external), internal processing times and bank holdings are the most common floats that can lead to a delay in actually turning a collection into on hand cash. On the flip side, when a deposit is made, it can take the bank time to turn that transaction around into a disbursement back to us. Often, banks wait for funds to clear before releasing them. Nothing happens immediately.

Concentration

Organizations keep their capital tied up in cash for numerous reasons. Three of these reasons are transaction facilitation, compensating balances and investment opportunities (Cornett, Adair, JR, & Nofsinger, 2018). Transaction facilitation is cash that is reserved to pay wages, taxes, interest on debts, stock dividends and bills to providers. Compensating balances are a percentage of borrowed funds from lenders that is kept in an open checking account at the original lenders lending institution. Investment opportunities are cash that is kept on hand that is available in short notice for potential investment opportunities that often require quick action. These types of activities are reserved for when waiting for funds could result on a missed opportunity. Cash management is particularly important to new businesses as no matter how great a product or service is a poor cash management system or inadequate cash handling system can lead to unanticipated expenses a lack of funding in a timely manner (Cash Management, 2009).