Cash management: what it is and how it is applied in the company

Let's take a look at how money is managed in the company through cash management.

One of the many responsibilities that corporations have is to plan the use they are going to make of the cash they have.

With this article we will be able to discover how this function is carried out, what factors are the factors that are taken into account to ensure that cash management is as efficient as possible and the principles that no company should forget if it wants to be optimal in this task.

What is cash management?

Cash management, also known by its English name, cash management, refers to all the measures that a company takes to manage cash inflows and outflows in order to maintain an optimal financial state.. To achieve this goal, the organization has to keep an exhaustive control of the liquidity it has at all times, the payments it has to make as well as the financing possibilities it can obtain from banks.

The purpose of cash management is to ensure that the entity has the necessary funds to be able to meet its liabilities in each fiscal year and at the same time make the most efficient use of the surplus, if any, in order to maximize the cash flow.The purpose of cash management is to ensure that the entity has the necessary funds to meet its liabilities for each year, while at the same time making the most efficient use of the surplus, if any, to maximize investment returns. To this end, a balance must be achieved between the part used to settle debts, pay outstanding invoices, another part that is retained in cash and another part that is reinvested.

For all these issues, it is essential to have a treasurer who is able to carry out the appropriate management and control the inflows and outflows of money so that the state of the company's accounts is always adequate and does not lead to situations that could compromise the stability of the organization, because if there are problems at the financial level, they will inevitably have repercussions on all other facets of the company.

These may seem obvious statements, but sometimes they are not so obvious. The importance of proper cash management should not be underestimated. A study that analyzed why 101 startups had failed showed that the main cause, affecting 41 of them, was running out of cash. A demonstration of how financial mismanagement can quickly bankrupt a company..

Obviously, if a company runs out of cash, it also indicates that there are problems in other dimensions of the company or that some element is not developing as planned. In any case, it is more than enough reason to carry out an impeccable cash management, either to avoid generating new problems or to have enough solidity to be able to solve others that were generated in other departments.

Although it may seem that all the issues we have mentioned refer simply to the company's accounting, they are different concepts. It is possible that if the company is not a large one, both are carried out by the same department, but the larger the size of the corporation in question, the more likely it is that they have specialized one team for accounting and another for cash management.

How to carry out a correct cash management

Once we know the importance of cash management, the question arises as to the best way to carry it out. Although, as in everything related to the economy, there are no magic formulas, there are questions that in many occasions respond to common sense. Let's take a closer look at some of them.

1. Shared responsibility between departments

At first glance, it might seem that everything related to cash management should be handled solely by the finance department, but in reality it is such an important issue that it concerns many other areas of the company. it concerns many other areas of the company..

For example, the commercial department has a much deeper knowledge of the different customers it works with and, in some cases, a closer relationship with them. Therefore, it would be reasonable to consider the possibility that the salesperson in charge of a customer who has outstanding payments with our company should contact him and make him see the situation he is in, thus trying to resolve the incident as soon as possible and that the company receives the amount owed so that cash management is not compromised for a longer period of time.

2. Pay suppliers on time

In the previous point we have given the example of a customer of our company who has been late in a payment and therefore has a debt with us. But we must not forget that the opposite case is also a common scenario in the business world. That is to say, it is often the company itself that delays the payment of invoices to its suppliers for certain reasons.for certain reasons. One of them is, supposedly, to take care of cash management.

Although this is the objective, this practice is harmful. Using suppliers as if they were financial institutions that give us credit when we need it is a mistake. It will have a serious reputational impact, as it will be difficult to collaborate with the same supplier in the long term if the reputation of our company is that it pays late. Sometimes this practice is used before the quarterly or annual accounts close because it is foreseen that liquidity is needed.

However, it is not excusable. If this is the case, it is best to agree in advance with the supplier on a payment date that the company knows it can meet. In addition, we could be seriously deteriorating the cash management of the supplier company, since it is money that they expected and that they are not receiving, weakening their accounts, sometimes seriously, if the order placed is important and it is a small company.

3. Explore different forms of financing

Another way to take care of cash management is to evaluate forms of financing beyond the classic bank loans, which are the mechanisms usually resorted to and which generate high costs for the company. For example, to balance accounts when there are many outstanding customer receivables, large corporations are turning to so-called debt collection companies..

These companies advance the original company almost all of the debt that the third party has with them and is responsible for managing the collection of the outstanding invoice with that customer, keeping a commission for the work done. This is a win-win relationship for both companies, which is a perfect mechanism for cash management, which sees how cash flow is not being put at risk by non-payments.

4. Review cash tied up

Another tactic we can resort to in order to optimize cash management is to a thorough review of balance sheets for any cash that may be tied up.. In this regard we may find, for example, revenues accrued because we have sold our products or provided our services to certain customers and have not yet been invoiced, for whatever reason.

Equally, we may find ourselves in the opposite position and be the ones who have paid a supplier in advance and have not yet been able to enjoy the items he was supposed to deliver to us. In both cases, it is the job of the cash management manager to control these cases in order to always be in the most efficient situation possible.

Objectives of cash management

We have already seen what cash management consists of and different ways to perform it correctly. We are now going to look at the different functions that this process fulfills.

1. Being able to cope with payments

Obviously, the first and probably the most important issue that we will be able to control with a proper cash management is that of to face the payments that our company must makeThe company's expenses, from those corresponding to its own employees to those of suppliers and other types of expenses.

2. Make expense forecasts

It is not only a question of making payments but also of planning them and knowing how much we can spend at each moment, preparing the forecasts for the year according to the capital we have or expect to have available. in every moment, preparing the forecasts for the exercise in function of the capital that we have or we expect to have.

3. Facing unforeseen expenses

Of course, no matter how much we try to plan everything, there are times when unforeseen situations arise, there are occasions in which unforeseen situations appear that cause expenses with which we did not count.. In these cases, a good cash management will allow us to face these events more easily.

4. Make good investments

If the economic situation of the company is very good, it is possible that it counts on available remainders to be able to be invested. Proper cash management involves choosing the best options to which to dedicate that money..

5. Manage funds efficiently

The balance between income and expenses is the backbone of a company's accounting, and it is essential to manage the funds available to us in the best possible way.To this end, it is essential to manage the funds available to us in the best possible way.

6. Never become insolvent

Of course, insolvency is a scenario that a company should never reach, as it is the prelude to bankruptcy.

Bibliographical references:

• Gitman, L.J. (2003). Principles of financial management. Pearson Educación.
• Kusnadi, Y., Wei, K.C.J. (2011). The determinants of corporate cash management policies: Evidence from around the world. Journal of Corporate Finance. Elsevier.
• Laitinen, E.K., Laitinen, T. (1998). Cash management behavior and failure prediction. Journal of Business Finance & Accounting. Wiley Online Library.
• Pérez, K.D., Socarrás, F., Labrada, E.D. (2014). Methodological procedures for cash management. Observatory of the Latin American Economy. Intercontinental Academic Services SL.