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Importance of Cash Management

April 9, 2015 by Ed Becker

Cash management and cash flow are two of the scariest things for any business to control. Improper cash management can lead to excessive debt or even bankruptcy. Lack of cash management can potentially put small businesses out of business. because they do not have good cash management.


  • What is cash management?

“The corporate process of collecting, managing and (short-term) investing cash. A key component of ensuring a company’s financial stability and solvency. Frequently, corporate treasurers or a business manager is responsible for overall cash management.” http://www.investopedia.com/terms/c/cash-management.asp

Without a cash management system or at least closely monitoring cash, a business can become non-solvent very quickly because they do not have available  cash for regular or unforeseen expenses. Many small businesses struggle with cash management and positive cash flow because they are dependent on sales and timely payments. It is similar to the personal financial dilemma of living paycheck to paycheck, with nothing left over from week to week.

  • Why is cash management important to any business?

Because it allows businesses to be solvent enough to keep the company in business even during slow activity or economic downturns. If your business cannot meet its monthly obligations for operations and liabilities you are not solvent. This means that a downturn in the economy or any loss of sales could be devastating.

Businesses that have poor cash management can fall behind in debt and monthly operational expenses, making it extremely hard to recoup stability. Sometimes when things are very rough   lack of cash flow can prevent the processing of payroll. Employees will not work if they do not get paid. If your cash flow issues get to that point the business has little chance to recover.


  • Cash management benefits:

1. Allows adequate cash for purchases and other purposes.

2. Ability to meet cash flow.

3. Allows planning for capital expenditure.

4. Allows for financing at better terms.

5. Enables you to make special purchases and take advantage of business opportunities.

6. Facilitates invest.


  • Practicing good cash flow management

One of the first steps in cash flow management is measuring liquidity, this means having the amount of cash on hand to meet current financial obligations. Then, you need to develop a cash flow projection. This allows you to manage cash on a daily basis as well as long term. And utilize cash management planning for short and long term goals. Using historical cash flow statements helps keep track of how money was used.

Keeping track of how cash was used in the past and knowing your current liquidity, will allow you to make long strides in managing cash flow. Knowing where your cash comes from and goes to is vital to being able to manage your available cash.


  • Controlling cash

This is essential in managing cash flow both in the short and long term. Ensuring that outstanding debts are managed cuts down on cash shortages. Making wise investment decisions allows cash to be available when it is needed. If you tie up cash in long term stock it is not available to invest in something short term with a good ROI. Also, ensuring that you pay your payables on time keeps cash flow of suppliers moving, and prevents them from increasing your prices of necessary items. By managing your cash flow properly you help to ensure that the economy runs smoother for everyone.


  • Goals of good cash management for your business

The largest goal of good cash management systems is to reduce or eliminate any surprises when meeting cash requirements. Good cash management influences the efficiency of operations and reduces overall cost of doing business.



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