Cash Management

Cash Management Definition

Cash management refers to the collection, concentration, and disbursement of cash in a business. In accounting, cash management is how a company will manage all aspects of the financial end of their business, such as collecting revenue, investing the company’s cash, and other assets.

Cash management is a essential to ensuring a company’s financial stability and solvency. Successful cash management means avoiding insolvency, but also reducing the length of accounts receivable, increasing collection rates of revenues and other cash, choosing proper short-term investments, and increasing the amount of cash on hand to improve profitability. It is important to ensure sufficient cash on hand to meet a company’s obligations, while also investing idle cash appropriately.

The responsibility and related duties of cash management usually falls on the corporate business manager or treasurer of a company. Successfully managing cash is important especially for small businesses who wait longer for accounts receivable and have less access to affordable credit and large amounts of upfront costs. Having sufficient cash on hand allows companies to handle regularly occurring expenses like payroll, as well as unexpected expenses without insolvency.

Cash management aims to achieve optimal efficiency in two key areas — receivables (cash coming in) and payables (cash going out). For example:

  • Receivables management: When an invoice is posted as an account receivable, the cash is not yet received. Payment terms can vary and cause cash crunches because of slow or poorly managed accounts. The faster the business can receive the cash, the more cash on hand they will have to stay afloat.
  • Payables management: If a business controls its payables, it can better control its cash flow. By improving the overall efficiency of the payables process, businesses can not only reduce costs but also keep more cash in the business.

While cash shortages may seem like a sign of a company’s weakness or mismanagement, it cannot be seen as that in all cases. Careful cash planning can sustain growth, and successful companies may need cash for additional upfront costs like new locations, added inventory, or growing receivables.

A detailed cash budget is a key component of a cash management system. It details the cash in and cash out at certain periods of time, and should be maintained and updates on a regular basis.

Best Practices

Cash is the lifeblood of a business, and proper cash management can often make the difference between success and failure. While it is important that a business generates profits and collects revenue, it is cash flow that indicates a business’s real health. As cash management is the handling of cash flow, there are cash management best practices, including:

  • Forecasting realistic projections for the business
  • Monitoring collection and disbursements (cash in and cash out)
  • Establishing effective billing and collection methods
  • Adhering to budgetary restrictions when necessary

Striking the right balance — meaning having enough cash on hand to meet obligations and not having too much cash out of precaution — is the overall goal of cash management. If a company keeps too much cash on hand, it could miss opportunities to invest the cash and generate more earnings.If a company doesn’t have adequate cash on hand to pay expenses, payroll, and investors, it may have to borrow cash or liquidate investments and assets to cover the shortfall; this risks insolvency and ultimately bankruptcy.


Cash Management Account













Source: Cash Management Account (Rethinking Finance)

Cash Flow

Source: Objectives of a Well-Designed Cash Management System (Best Solution Finance)

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