Cash management – What is it, definition and concept | 2022

Cash management is all the strategic actions that have an impact on the cash flows of a company. That is, in the management of the inflows and outflows of money from the entity, which will determine its availability of resources.

In other words, cash management is the management of the company’s cash, which translates into measures, from treasury management, to reach a certain level of liquidity.

Another way of understanding cash management is as the administration of collections, payments and the negotiation to obtain financing. This, by a commercial company.

The objective, behind these efforts, is that the company has an optimal level of liquidity (in cash or in deposits, in savings and credit institutions). In this sense, we must explain that, if the company does not have sufficient resources to meet its obligations in the short term, it will have to request loans, which will lead it to incur financial expenses in the future (for the payment of interest ).

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Looking at the other side of the coin, if the company has a lot of resources in its petty cash or in bank deposits, these could be invested to generate higher income. Therefore, it is about finding a middle ground between excess and lack of cash liquidity in the organization.

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Cash management tasks

Some cash management tasks are:

  • Management of the means of collection from customers, that is, accounts receivable.
  • Management of purchases and the conditions to be established with suppliers. For example, define whether it will be purchased on credit and, if so, for what term.
  • Negotiating financing terms with creditors, for example, when applying for a bank loan.
  • Permanent monitoring of financing conditions (interest rates, debt period, among others) in the market.
  • Management of money balances in charge of the treasury area.
  • Planning and monitoring of a liquidity plan for the company.
  • Define what technological tools (such as some software) can be useful to implement in cash management.

Because it is important?

Cash management is important because, although it is possible to observe the profit or net profit in the income statement, it is not the only thing that generates value for the company.

We must take into account that the fact of registering an income (or expense) in the income statement does not mean that the company has received (or has reduced) liquidity. And in the end, this variable is relevant because it is what will allow the firm to meet its commitments in the short term, for example, with the payment of employees or debts with banks or suppliers.

Finally, it is worth mentioning that cash management goes beyond simple treasury management, trying to incorporate a financial vision and optimization of results to cash management.

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