Cash Management: What It Is And How It Is Applied In The Company
One of the many responsibilities that corporations have is to plan how they will use the cash they have.
With this article we will be able to discover how this function is carried out, what they are the factors that are taken into account so that cash management is as efficient as possible and the principles that no company should forget if it wants to be optimal in this task.
Cash management, also known by its English name, cash management, refers to all the measures that a company carries out to manage the inflows and outflows of money with the aim of maintaining an optimal financial state To achieve this goal, the organization must keep 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 banks.
The purpose of cash management is ensure that the entity has the necessary funds to be able to meet the liabilities it has in each year and at the same time make the most efficient use of the surplus , if any, to maximize the benefits of the investment. To do this, a balance must be achieved between the part that is used to settle debts, pay pending invoices, another part that is retained 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 balance sheet is always adequate and situations do not arise that could compromise the company. the stability of the organization, because if there are problems at a financial level, they will inevitably have an impact on 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 analyzed the reason why 101 startups had failed showed that the main cause, affecting 41 of them, was running out of cash. A demonstration of how Incorrect financial management can quickly lead the company to bankruptcy
Obviously, if a company runs out of cash it also tells us 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 impeccable cash management, either to avoid generating new problems or to be strong enough to be able to solve others that were generated in other departments.
Although it may seem that all the issues we have mentioned simply refer to company accounting, they are different concepts. It is possible that if the company is not large, both managements are carried out by the same department, but the larger the corporation in question is, 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, we should ask ourselves what is the best way to carry it out. Although, as in everything related to the economy, there are no magic formulas, there are issues that often respond to common sense. Let’s look at 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 by the financial department, but in reality it is such an important issue that It concerns many other sectors of the company
For example, the sales 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 of the salesperson 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 he is in, thus trying to resolve the problem. incident as soon as possible and that the company receives the amount owed so that cash management is not compromised for any longer.
2. Pay suppliers on time
In the previous point we have given the example of a client of our company who has been late with a payment and therefore has a debt with us. But we must not forget that the opposite case is also usually 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, taking care of cash management.
Although that is the objective, this practice is disastrous. Using suppliers as if they were financial entities that give us credit when we need it is a mistake. At the reputation level, it will seriously affect us, since it will be difficult to collaborate with the same supplier in the long term if our company’s reputation is that it pays untimely. This practice is sometimes used before quarterly or annual account closings because it is anticipated that liquidity will be needed.
Likewise, it is not excusable. If that is the case, the optimal thing will be to previously agree with the supplier on a payment date that the company knows it can accept. Furthermore, we could be seriously deteriorating the cash management of the supplier company, since it is money that they expected and that they are no longer receiving, 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 classic bank loans, which are the mechanisms 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 are responsible for managing the collection of the pending invoice with said client, keeping a commission for the work performed. It is a relationship in which both companies benefit, which is a perfect mechanism for cash management, which sees how the flow of money is not being put at risk due to non-payments.
4. Review frozen cash
Another tactic we can use to optimize cash management is the exhaustive review of balance sheets in search of possible cash that is tied up In this sense, we may 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 just the opposite position and be the ones who have paid in advance to a supplier and still have not been able to enjoy the elements that were supposed to serve us. In both cases, it is the job of the person responsible for cash management to control these cases in order to always remain 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. Let’s now see different functions that this process fulfills.
1. Being able to afford payments
Obviously, the first and probably the 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 corresponding to their own employees to those of suppliers and other types of expenses.
2. Make spending forecasts
It is not only about making payments but also 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. Face unforeseen expenses
Of course, no matter how much we try to plan everything, There are times when unforeseen situations appear that cause expenses that we did not count on In these cases, good cash management will allow us to face these events with greater ease.
4. Make good investments
If the economic situation of the company is very good, it is possible that it has surpluses available to be invested. Correct cash management involves choose the best options to dedicate that money to
5. Manage funds efficiently
The balance between income and expenses It 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 become insolvent
Of course, insolvency is a scenario that the company should not reach, as it is the prelude to bankruptcy.
