Cash management as the word suggests is the optimum utilization of cash to ensure maximum liquidity and maximum profitability. It refers to the proper collection, disbursement, and investment of cash.
Importance of cash management
Just like a ‘no cash situation’ in our day to day lives can be a nightmare, for a business it can be devastating. Especially for small businesses, it can lead to a point of no return. It affects the credibility of the business and can lead to them shutting down. Hence, the most important task for business managers is to manage cash. Management needs to ensure that there is adequate cash to meet the current obligations while making sure that there are no idle funds. This is very important as businesses depend on the recovery of receivables. If a debt turns bad (irrecoverable debt) it can jeopardize the cash flow. Therefore, cash management is also about being cautious and making enough provision for contingencies like bad debts, economic slowdown, etc.Functions of cash management
In an ideal scenario, an organization should be able to match its cash inflows to its cash outflows. Cash inflows majorly include account receivables and cash outflows majorly include account payables. Practically, while cash outflows like payment to suppliers, operational expenses, payment to regulators are more or less certain, cash inflows can be tricky. So the functions of cash management can be explained as follows :Inventory management
Higher stock in hand means trapped sales and trapped sales means less liquidity. Hence, an organization must aim at faster stock out to ensure movement of cash.Receivables Management
An organization raises invoices for its sales. In these cases, the credit period for receiving the cash can range between 30 – 90 days. Here, the organization has recorded the sales but has not yet received cash for the transactions. So the cash management function will ensure faster recovery of receivables to avoid a cash crunch. If the average time for recovery is shorter, the organization will have enough cash in hand to make its payments. Timely payments ensure lesser costs (interests, penalties) to the organization. Receivables management also includes a robust mechanism for follow-ups. This will ensure faster recovery and it will also assist the business to predict bad debts and unforeseen situations.Payables Management
While receivables management is one of the primary areas in the cash management function, payables management is also important. Payables arise when the organization has made purchases on credit and needs to make payments for the same within a fixed time.