Cash Management: By: Judy Ann G. Silva, MBA

CASH
MANAGEMENT
By: Judy Ann G. Silva, MBA
WHAT IS CASH MANAGEMENT?
Cash management, also known as treasury management, is the process that
involves collecting and managing cash flows from the operating, investing,
and financing activities of a company. In business, it is a key aspect of an
organization’s financial stability.
Cash management is important for both
companies and individuals, as it is a key
component of financial stability.
Financial instruments involved in cash

management contain money market funds,
Treasury bills, and certificates of deposit.
The Importance of Cash
● Cash is the primary asset individuals and companies use

regularly to settle their debt obligations and operating
expenses,
● Cash is used as investment capital to be allocated to
long-term assets, such as property, plant, and equipment
(PP&E) and other non-current assets. Excess cash after
accounting for expenses often goes towards dividend
distributions.
● Companies with a multitude of cash inflows and outflows
must be properly managed to maintain adequate business
stability. For individuals, maintaining cash balances is also
a major concern.
Understanding Cash Management
The cash flow statement is the main component of a

company’s cash flow management. The cash flow
statement comprehensively records all of the
organization’s cash inflows and outflows. It includes cash
from operating activities, cash paid for investing activities,
and cash from financing activities. The bottom line of the
cash flow statement shows how much cash is readily
available for an organization.
Operating activities
This includes cash activities related to net income. For

example, cash generated from the sale of goods (revenue)
and cash paid for merchandise (expense) are operating
activities because revenues and expenses are included in
net income.
Investing activities
Include cash activities related to noncurrent assets.

Noncurrent assets include (1) long-term investments; (2)
property, plant, and equipment; and (3) the principal
amount of loans made to other entities.
Financing activities
Include cash activities related to noncurrent liabilities and

owners’ equity. Noncurrent liabilities and owners’ equity items
include (1) the principal amount of long-term debt, (2) stock
sales and repurchases, and (3) dividend payments
Causes of Problems with Cash Management
1. Poor understanding of the cash flow cycle
Business management should clearly understand the

timing of cash inflows and outflows from the entity,
such as when to pay for accounts payable and purchase
inventory. During rapid growth, a company can end up
running out of money because of over-purchasing
inventory, yet not receiving payment for it.
2. Lack of understanding of profit versus
cash
A company can generate profits on its income
statement and be burning cash on the cash flow
statement.
When a company generates revenue, it does not

necessarily mean it already received cash payment for
that revenue. So, a very fast-growing business that
requires a lot of inventory may be generating lots of
revenue but not receiving positive cash flows on it.
3. Lack of cash management skills
It is crucial for managers to acquire the necessary

skills despite the understanding of the above
mentioned issues. The skills involve the ability to
optimize and manage the working capital. It can
include discipline and putting the proper frameworks
in place to ensure the receivables are collected on
time and that payables are not paid more quickly
than is needed.
4. Bad capital investments
A company may allocate capital to projects that ultimately do

not generate sufficient return on investment or sufficient
cash flows to justify the investments. If such is the case, the
investments will be a net drain on the cash flow statement,
and eventually, on the company’s cash balance.
Cash Flow Management Strategies
1. Collection Policy
Enforce a formal collection policy to manage your

accounts receivable balance. Your accounting software
should provide an aging schedule for accounts receivable.
The software groups your receivables based on when each
invoice was issued. You should monitor this report and
implement a collections process to email and possibly call
clients to ask for payment.
2. Offer Discounts
Offer customers a discount, if they pay an invoice within
10 days. Sure, you’ll collect slightly less cash. But some
customers will pay faster, which improves your cash
inflows.
3. Manage Inventory Effectively
Managing inventory is a balancing act.
Thus, you may keep a supply of finished items on hand as inventory if your business is
manufacturing . Carrying an inventory balance allows you to quickly fill orders so
that clients don’t have to wait.
But you want to minimize the dollars tied up in inventory, while making sure not to
lose a potential sale.
Smart inventory management requires time and effort. You will need to analyze:
● the dollar amount of inventory carried in past years,

● sales generated, and
● the number of sales lost due to a stockout (when an inventory item is out of
stock).
4. Better Systems
Every business should use technology to collect cash faster.

This includes using software tools that speed up the time it
takes to transfer payments into the company bank account.
Thus, you can dramatically improve your cash position if you
can speed up cash inflows by just a few days.

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CASH

Financial instruments involved in cash

● Cash is the primary asset individuals and companies use

The cash ﬂow statement is the main component of a

This includes cash activities related to net income. For

Include cash activities related to noncurrent assets.

Include cash activities related to noncurrent liabilities and

1. Poor understanding of the cash ﬂow cycle

Business management should clearly understand the

When a company generates revenue, it does not

It is crucial for managers to acquire the necessary

A company may allocate capital to projects that ultimately do

Enforce a formal collection policy to manage your

● the dollar amount of inventory carried in past years,

Every business should use technology to collect cash faster.

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