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What is 'Cash Management'

Cash management is the corporate process of collecting and managing cash, as well as using it for (short-term) investing. It is a key component of ensuring a company's financial stability and solvency. Corporate treasurers or business managers are frequently responsible for overall cash management and the related responsibilities to remain solvent.

BREAKING DOWN 'Cash Management'

Successful cash management involves not only avoiding insolvency, but also reducing the length of account receivables (AR), increasing collection rates, selecting appropriate short-term investment vehicles, and increasing cash on hand to improve a company's cash position and profitability.

Successfully managing cash is an essential skill for small business developers, because they typically have less access to affordable credit and have a significant amount of upfront costs to manage while waiting for receivables. Wisely managing cash enables a company to meet unexpected expenses, and to handle regularly occurring events such as payroll distribution.

Functions of Cash Management

Cash management is the treasury function of a business, responsible for achieving optimal efficiency in two key areas: receivables, which is cash coming in, and payables, which is cash going out.

Receivables Management

When a business issues an invoice it is reported as a receivable, which is cash earned but yet to be received. Depending on the terms of the invoice, the business may have to wait 30, 60 or 90 days for the cash to be received. It is common for a business to report increasing sales, yet still run into a cash crunch because of slow or poorly managed receivables. There are a number of things a business can do to accelerate its receivables and reduce payment float, including clarifying billing terms with customers, using an automated billing service to bill customers immediately, using electronic payment processing through a bank to collect payments, and staying on top of collections with an aging receivables report.

Payables Management

When a business controls its payables, it can better control its cash flow. By improving the overall efficiency of the payables process, a business can reduce costs and keep more cash working in the business. Payables management solutions, such as electronic payment processing, direct payroll deposit, and controlled disbursement can streamline and automate the payable functions.

Most of the receivables and payables management functions can be automated using business banking solutions. The digital age has opened up opportunities for smaller businesses to access the same large-scale cash management technologies used by bigger companies. The cost savings generated from more efficient cash management techniques easily offsets the costs. More importantly, management will be able to reallocate precious resources to growing the business.

  1. Accounts Receivable - AR

    Money owed by customers (individuals or corporations) to another ...
  2. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to ...
  3. Receivables

    An asset designation applicable to all debts, unsettled transactions ...
  4. Cash

    Cash is legal tender or coins that can be used to exchange goods, ...
  5. Operating Cash Flow - OCF

    Operating Cash Flow (or OCF) is a measure of the amount of cash ...
  6. Cash Conversion Cycle - CCC

    Cash conversion cycle (CCC) is a metric that expresses the length ...
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