Cash management: what it is and how it applies to the business

One of the many responsibilities of businesses is to plan how they are going to use the money they have.

With this article we will be able to discover how this function is carried out, what they are the factors 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 steps a business takes to manage cash inflows and outflows in order to maintain optimal financial condition. To achieve this, the organization must carry out a thorough control of the liquidity available to it at all times, the payments it must make as well as the funding possibilities it can obtain from banks.

    The purpose of treasury administration is ensure that the entity has the necessary funds to be able to honor the commitments it has each year and at the same time to use the surplus as efficiently as possible, Where appropriate, to maximize return on investment. To do this, you need to strike a balance between the part that you use to settle debts, pay the unpaid bills, another part which is kept in cash and another which is reinvested.

    For all these questions, it is essential to have a treasurer able to implement the appropriate procedures and who controls the inflows and outflows of money so that the financial statements of the company are always adequate and do not lead to situations likely to compromise stability. of the organization, as if there were problems at the financial level, they will inevitably have an impact on all other facets of the business.

    They may seem obvious, but sometimes they are not so obvious. The importance of good cash management should not be underestimated. A study that looked at why 101 startups failed showed that the main cause, affecting 41 of them, was lack of cash. A demonstration of how poor financial management can quickly lead the business to bankruptcy.

    Obviously, if a business is strapped for cash, that also tells us that there are issues in other dimensions of the business or that something is not growing as expected. In any case, this is more than enough reason to carry out impeccable cash management, either not to generate new problems, or to have sufficient strength to be able to solve others that have been generated in the past. other departments.

    While it may appear that all of the issues we have mentioned are just about the accounting of the business, they are different concepts. It is possible that if the company is not large, both arrangements will be carried out by the same department, but the larger the company in question, the more likely it is to have specialized a team for accounting and an accountant. other for the administration of the treasury.

    How to do good cash management

    Once we know the importance of cash management, we need to ask ourselves what is the best way to do it. While, as with anything related to economics, there are no magic formulas, there are questions that often answer common sense. Let’s take a look at some of them in more detail.

    1. Responsibility shared between departments

    At first glance, it may seem that everything related to cash administration should be handled only from the finance department, but in reality it is such an important issue that belongs to many other areas of the company.

    For example, the sales department has a much deeper knowledge of the different clients they work with as well as a closer relationship with them, in some cases. Therefore, it would be reasonable to consider the possibility that the seller is in charge of a customer who has debts with our company, who takes care of contacting him and showing him the situation in which he finds himself, thus trying to resolve the incident as soon as possible and for the company to receive the amount owed so that the administration of the treasury is not compromised any longer.

      2. Pay suppliers on time

      In the previous point, we gave the example of a customer of our company who was late in a payment and therefore owed us a debt. But it should be remembered that the opposite is also often a common scenario in the business world. In other words, that is to say it is often the company itself that delays the payment of invoices to its suppliers, For some reasons. One of them is supposed to take care of cash management.

      Although this is the goal, this practice is disastrous. It is a mistake to use suppliers as if they were financial institutions that give us credit when we need it. Reputation level, this 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 it is expected that liquidity will be required.

      Likewise, it is not excusable. If this is the case, it is best to agree in advance with the supplier on a payment date that the company knows it can meet. In addition, we could seriously deteriorate the cash management of the supplier company, as it is money that they were expecting and not receiving, weakening their accounts, sometimes severely, if the order placed is important and that it is a small business.

      3. Explore different forms of funding

      Another way to take charge of cash management is to evaluate forms of financing beyond traditional bank loans, which are the mechanisms usually used and which generate high costs for the business. For example, to balance the books when you have a lot of outstanding client collections, large businesses turn to collection companies.

      These companies advance substantially all of the debt the third party owes them to the originating company and is responsible for handling the collection of the unpaid invoice with the customer, leaving a commission for the work performed. This is a relationship in which both companies are favored, which is a perfect mechanism for cash management, which sees the flow of money not endangered by defaults.

      4. Check the fixed assets

      Another tactic we can use to optimize cash management is in-depth review of balance sheets in search of any tied up liquidity. In this sense, we may find, for example, income accrued because we have sold our products or provided our services to certain customers and have not yet been invoiced, for whatever reason.

      Likewise, we may find ourselves in the opposite position and be the ones who paid the down payment to a supplier and we have not yet been able to take advantage of the items that were to serve us. In both cases, it is up to the person in charge of the administration of the treasury to control these files so that they can always remain in the most efficient situation possible.

      Objectives of treasury administration

      We have already seen what treasury administration is and different ways of doing it. Now let’s take a look at the different functions that this process performs.

      1. Ability to honor payments

      Obviously, the first and probably the most important problem that we will be able to tackle with good cash management is that of face the payments that our company has to make, Hence they correspond to their own employees as to those of suppliers and other types of expenditure.

      2. Make expenditure forecasts

      It’s not just about making payments, but also planning for them and knowing how much we can spend at any time, prepare the forecast for the year based on the capital we have or hope to have.

      3. Face unforeseen expenses

      Of course, no matter how hard we try to plan everything, there are times when unforeseen situations arise that result in expenses that we did not expect. In these cases, good cash management will make it easier for us to manage these events.

      4. Make good investments

      If the economic situation of the company is very good, it is possible that it has surplus to be able to invest. Good cash management involves choose the best options to spend that money.

      5. Manage funds efficiently

      The balance between revenue and expenditure it is the backbone of a company’s accountingAnd for that, it is essential to manage the funds at our disposal as well as possible.

      6. Never Reach Insolvency

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

      Bibliographical references:

      • Gitman, LJ (2003). Principles of financial administration. Pearson Education.
      • Kusnadi, Y., Wei, KCJ (2011). The Determinants of Corporate Cash Management Policies: Tests from Around the World Journal of Corporate Finance. Elsevier.
      • Laitinen, EK, Laitinen, T. (1998). Cash flow management behavior and error prediction. Journal of Business Finance & Accounting. Wiley Online Library.
      • Pérez, KD, Socarrás, F., Llaurada, ED (2014). Methodological procedures for the administration of the treasury. Observatory of the Latin American economy. Intercontinental Academic Services SL.

      Leave a Comment