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Cash Management - A Key Component of Financial Management

CPA Innocent MUGISHA
Apr 10, 2024
5 min read
Cash Management
CPA Innocent MUGISHA

In this article, we will explore the topic of cash management, which is a key component of financial management. Learn effective cash flow management with these practical tips and best practices.

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The function of cash management is to ensure that the business has sufficient cash to meet its current and future needs, while maximizing its return on excess cash. Cash management is essential for the financial health and sustainability of any business. By managing its cash flows effectively, a business can improve its liquidity, profitability, efficiency, and competitiveness.


There are four main aspects of cash management that every business should consider:

 

  1. Cash availability: This refers to the amount of cash that the business has on hand or can access quickly to meet its immediate needs.


  2. Cash conversion: This refers to the speed at which the business can convert its assets and liabilities into cash or vice versa.


  3. Cash allocation: This refers to the way that the business allocates its cash among various uses, such as operating expenses, capital expenditures, debt repayment, or dividends.


  4. Cash control: This refers to the measures that the business takes to monitor, protect, and regulate its cash flows.

 

By paying attention to these four aspects of cash management, a business can ensure that it has enough cash to operate smoothly and efficiently.


Some of the examples of cash management in practice include the following;

 

  • Forecasting cash flows: A business needs to estimate how much cash it will receive and spend in a given period, such as a week, a month, or a year. This helps the business plan its budget, avoid cash shortages, and identify financing needs. For example, a retailer may forecast its cash inflows based on its sales projections and its cash outflows based on its operating expenses and inventory purchases.


  • Collecting payments: A business needs to collect payments from its customers as quickly and efficiently as possible, reducing the time between making a sale and receiving the cash. This improves the business's cash flow and reduces the risk of bad debts. For example, a service provider may offer discounts or incentives for early or online payments, or use electronic invoicing and payment systems to speed up the collection process.


  • Paying bills: A business needs to pay its suppliers, employees, lenders, and other creditors on time and in full, avoiding penalties, interest charges, and damage to its reputation. However, a business may also want to take advantage of any discounts or benefits for early or prompt payments, or negotiate favorable payment terms with its creditors. For example, a manufacturer may pay its suppliers within 10 days to get a 2% discount, or pay its suppliers within 30 days to conserve cash for other purposes.


  • Investing surplus cash: A business may have excess cash that it does not need for its immediate operations or obligations. In this case, the business may want to invest this cash in short-term or liquid assets that can generate income and can be easily converted back to cash when needed. For example, a company may invest its surplus cash in a money market account, a certificate of deposit, or a treasury bill.


  • Managing risks: A business faces various risks related to its cash flows, such as currency fluctuations, interest rate changes, inflation, fraud, theft, or natural disasters. These risks can affect the amount and timing of the business's cash inflows and outflows, and thus its liquidity and profitability. To manage these risks, the business may use various strategies, such as hedging, diversification, insurance, or contingency planning. For example, an exporter may hedge its foreign currency exposure by using forward contracts or options.

CPA Uganda April Intake 2024

Cash management services are services offered by banks or other financial institutions to help businesses manage their cash flows. These services may include:

 

  • Cash flow analysis: This involves analyzing the past and projected cash flows of the business, identifying patterns, trends, gaps, and opportunities for improvement.

     

  • Cash flow forecasting: This involves estimating the future cash inflows and outflows of the business based on various assumptions and scenarios.

     

  • Cash flow optimization: This involves recommending and implementing solutions to optimize the cash inflows and outflows of the business, such as reducing collection cycles, extending payment terms, investing surplus cash wisely, or managing risks effectively.

     

  • Cash flow reporting: This involves providing regular and timely reports on the actual and expected cash flows of the business, highlighting any deviations from the budget or plan.

 

Cash management services can help businesses improve their cash flow management by providing them with expert advice, tools, and resources.


We hope you enjoyed this article on cash management and learned something new.


If you want to learn more about this topic and other aspects of financial management,

you can check out our financial management online course and our financial management eBook and Practice and revision kit.

CPA Innocent MUGISHA

CPA Innocent Mugisha is a Professor of Finance and Accounting with over 10 years experience in teaching Accounting and Finance related courses including Financial Accounting both at University and Professional level. His qualifications are: PhD (candidate), MBA(Finance), CPA(U), FCCA, CIPS, CTA and BCOM (Accounting). Innocent has also published various books on most topics in Accounting and Finance for Business and Professional Studies.

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CPA Innocent MUGISHA
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