Cash Management

Effective Cash Management Directly Affects Profitability

/ Finance / Cash Management

If you want to know the secret of successful companies, observe their cash management systems

What is cash management?

We all use cash to pay our financial obligations regularly. Whether in the context of personal finance or business, money should be available in time to pay expenses when it is due. Many factors can affect the availability of cash funds. Therefore, there is a need for Cash Management.

Cash management is more than just collecting cash. It also covers its handling and usage. One of its critical functions is assessing market liquidity, cash flows, and investments. The financial instruments used in cash management are usually money market funds, treasury bills, and certificates of deposit.

CFOs and Cash Management

Cash management plays a critical role in the success of a business. The biggest spender in a business is the CFO. In fact, a CFOs job is to spend money.

The association with finance and accounting executives and cutting cost has twisted the true function of a business’ top finance executive. The CFO pays employee wages, pays vendors, pays taxes, pays rent, pays benefits and pays utilities. They are constantly spending money and always wary of how to manage cash successfully.

Common Cash Management Services

  • Account reconciliation, particularly checks

  • Automatic cash handling to avoid theft
  • Cash balance reporting, including foreign currencies
  • Cash concentration services to pull cash into a single, interest-bearing account

  • Controlled disbursement to allow investment of surplus cash

  • Sweep accounts to move funds into overnight investments
  • Zero balance accounts to avoid penalties to avoid overdrafts

Importance of Cash Management in Accounting

If you want to know the secret of successful companies, observe their cash management systems. An adequate system has the right balance of liquidity and profitability. Here are the reasons why management should give importance to cash management.


Avoid it.
If a company is unable to pay its obligations on time due to insufficient cash, the company is labeled ‘insolvent.’ Insolvency could lead to bankruptcy.


Reduce it.
If there are no cash flow problems, this means less exposure to risk when the economy is down. Some business owners have tried their best to keep the business afloat by getting cash from their finances, mortgaging their homes, and maxing out their credit cards.


Facilitate them.
Companies that present positive cash flow financial statements have better chances of securing a loan.


Improve it.
With the correct management of cash inflows and outflows, the system can identify surplus or idle funds for short-term investment. Remember the concept of sweep accounts.

Having a positive cash flow will also enable companies to proceed with innovation and expansion.

Elements of Cash Management

Cash Management needs integration into businesses’ regular standard procedures. Here is a list of focus areas to properly manage cash.

Reconciling all bank accounts regularly

Prompt reconciliation of bank accounts will give clues on how to avoid delays in collection. Moreover, regular and detailed bank reconciliation is the best way to expose fraudulent activities.

Creating realistic cash flow budget

Forecasting is the first step in attaining a workable cash flow budget. Moreover, regular reviews of the cash flow statement will highlight a possible shortfall in cash.

The statement will show if cash inflow was from an account receivable and if cash was released to pay for account payables, investments, and operations.

Tracking current and projected revenue

Knowing the current revenue situation will affect the cash flow, whether the budget needs tightening or there is enough cash for investments. Likewise, keeping sight of projected revenues will be the basis for the possible allocation of money for product improvements or business expansion.

Monitoring and prioritizing cash disbursements

An analysis of the cash flow will show fraudulent cash disbursements and unnecessary business expenses.

Implementing timely collection of receivables

Three kinds of float cause cash delays.  Mail float is a delay in receiving checks through the mail.  Processing float is a delay in the company’s internal processing of cash and checks.  Bank float is a delay due to the normal clearing process.

Delays can also be due to customers deliberately not paying on time.  Therefore, companies should establish a robust billing and collection system and optimize their cash collection methods.

Best Practices for Cash Management

Having an efficient cash management process may be complicated, but it is critical. Below are five best practices in cash management.

1. Select reputable cash management banking partners

When deciding on a bank, choose those that provide high-quality services over low costs. It is preferable to rely on a few banks as partners instead of being dependent on a single bank.

Gather as much input from your departments about their cash management requirements. Then, compare to what the bank has to offer. Make sure that the bank can meet your future needs. It would be tedious and costly to change banks later.

Shortlist a few banks. Use scorecards and compare the banks’ services and fees. Keep this as your guide in case you need the services of other banks in the future.

2. Develop accurate forecasting models

To minimize the uncertainty of cash flows, use forecasting. A forecasting model uses both qualitative information and quantitative information to determine trends.

Forecasts depend on the seasons and could also vary based on daily, monthly, and cyclical patterns. Predictions can also be short, medium, and long term.

A forecast does not remain constant. Instead, it follows a “rolling format,” changing as soon as new information arrives.

3. Find the best ways to improve investment yields at the lowest cost

A written document on investment objectives and guidelines is necessary to ensure that everyone, from directors to investment managers, shares the same understanding of what makes an investment opportunity acceptable.

One way of ensuring that funds don’t stay idle in non-interest-bearing accounts, companies use sweep accounts. Unused funds are moved or “swept” into overnight investments at end-of-day.

Another way is to use zero-balance accounts. Bank customers are allowed to write checks and drafts from these accounts without penalty since these accounts have no required maintaining balance.

4. Regularly review the cash management system

A constant review identifies areas for improvement, ensures regular tracking, and provides assurance on the reliability of financial data without having to resort to a formal audit. It should focus on processes that directly affect cash cycles.

The review also includes an assessment of the partner bank’s performance, charges, and investment yields. Risk factors affecting cash flow are also part of the evaluation – fraud, liquidity risk, and daily cash flow risks.

Gather data through detailed questionnaires and onsite visits to partner banks.

Cash Management System

There is an IT solution to cash management called CMS (Cash Management System). It is an end-to-end solution to managing cash, from the point of sale up to deposit and reconciliation. The software solution increases efficiency, improves accuracy and productivity, provides better security, and controls cash and data.

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