Cash management is an essential function for the survival of a company. It ensures the availability of the liquidities necessary to honor its commitments toward its suppliers, employees and creditors. If you’re interested in a business career or as an entrepreneur, you can’t afford to miss this essential skill.
This article will look at different facets of this essential growth element, the techniques and tools used to manage cash effectively, and the benefits of good cash management for businesses.
What Is Corporate Cash Management?
Cash management is a crucial skill in business and is highly sought after by employers. Companies need competent professionals in this field to optimize their profitability, improve their cash flow and reduce financial risks.
Indeed, a cash manager oversees the cash that can be mobilized immediately to meet the payment needs of a company, such as the payment of invoices, salaries and suppliers. He juggles this financial discipline which implies monitoring all incoming and outgoing financial flows of any organization. Good cash management thus makes it possible to optimize resources, anticipate financing needs and plan payment deadlines. In other words, we monitor the flow of debit/credit, receipts/disbursements, and receipts/expenses.
Whatever name we give to these movements of money, cash is the balance available at a given time in the cash registers or the bank accounts of a company, organization or individual. A negative cash flow is not an indicator of good financial health, which is one reason why it is important to know how to manage it sustainably.
Why Is It Important To Manage Cash Well?
First, a healthy cash position guarantees the company’s solvency by ensuring the availability of the necessary liquidities. In this way, she can honor her short-term commitments without any problem. It is, therefore, a major tool for optimizing profitability: on the one hand, by minimizing costs. On the other, by maximizing income generated by cash surpluses.
In addition, effective management helps forecast medium- and long-term financing needs and thus prepare for possible periods of economic turbulence. Finally, the cash reflects the company’s image: late payments will highlight a company in difficulty, inevitably affecting its reputation.
The main objective above all theropod day-to-day cash management is to have a vision and anticipate needs as much as possible.
How Is Cash Management Done?
Cash management is an essential technical tool in the economic and financial environment. As such, it involves various key activities, such as:
- data collection
- data analysis
- flow forecasting
- cash management
- financial risk management
- negotiation of financing conditions.
For this, the cash manager works closely with accountants, analysts and financial managers to ensure the most efficient management possible. Communication between these stakeholders is, therefore, essential. To help them in this work, several free or paid solutions exist on the market. The most commonly used tool is Excel, or Google Sheets, spreadsheets that can be too complex to configure for modeling over several years.
Online cash management software is now widely used and is recommended for intuitive and simple use. Perfectly adapted even when you don’t know anything about spreadsheets, they provide ease of use and security of the information entered to monitor your company’s finances.
Of course, there are differences in cash management between large and small businesses. For example, large companies face greater cash flow, which often involves more structured processes and sophisticated management tools than small companies.
What Are The Objectives Of Cash Management?
The objectives of cash management are multiple. Of course, they can vary according to the company’s specific needs.
Optimize Cash Flow
As you will understand, the main objective of cash management is to optimize the company’s level of liquidity. This involves making sure she has enough money to meet her short-term commitments. You must have enough money to pay suppliers, partners, employees, etc. The activity will be managed perfectly by having a complete vision of the money that comes in and goes out (loan, VAT, URSSAF, receipts, etc.). With this in mind, this refined management of future income and expenses will avoid unpleasant surprises in your bank account.
Financial Risk Management
Cash management provides immediate information on the company’s performance. Thus, it makes it possible to anticipate financial risks, for example, late payments and unpaid bills. Financial risk management, therefore, remains a primary objective. By anticipating off-peak periods, we can also avoid agios or, worse, payment defaults.
The main idea: get paid on time by your customers and establish regular monitoring to have the best long-term view of expenses and cash balance. Remember that a negative balance may lead to premiums…
A company’s profitability is not only dependent on a well-filled order book. Indeed, the cash surpluses further underline the smooth running of the activity. If trade receivables Suppose collected, and there is still unused money in the accounts, this money can be m. In that case, de profitable by various means: financial investments that earn interest, discounts, current account advances, or even investment financing.
On the other hand, the visualization of the cash flow plan over a year makes it possible to anticipate and plan the forecast sales volume to act at the desired time. In a slower period, we will not spend on this or that item, for example. Thus, implementing corrective actions can be done sufficiently upstream and maximize profitability.
How To Set up Cash Management?
Cash management first requires identifying your business’s sources of debits (or disbursements) and credits (or receipts). The headings to be identified are quite traditional:
l On the money inflow side, we find customer invoicing, inflows from bank investments, personal or investor contributions, etc.
l On the output side, these are the bills you pay to your suppliers or service providers, payroll costs, rents, loan repayments, and all the various items (energy, catering, etc.).
When you have gathered all the amounts of your inflows/outflows, all that remains is to enter them in your “provisional cash flow plan.” When a business is created, it is an accounting tool that will allow it to be managed long-term. Indeed, it is one of the four provisional financial analysis tables with the income statement, the balance sheet and the financing plan. The provisional cash flow plan is thus the table that will list all the cash inflows and outflows over a year. The idea is to break down the amounts over a year and view the financial balance month by month.
This tool may seem complicated to create when creating a business since no previous amounts are available. You must imagine everything and start from a blank page or research elements. For example, it is a table that can be found in a business plan.
The next step will be to make forecasts at 1, then 3, then six months and finally one year. Preparing a cash flow forecast for three or even five years is customary for a business plan. It will indeed be used to negotiate funding requests, for example, and to justify them. The hardest part: anticipating receipts since, by definition, they have yet to occur! Of course, you will then have to fill in the “real” figures as you go along, in particular bill payments or receipts, and thus obtain an accurate cash balance at all times. Updating this short-term data will allow you a long-term vision.
To be a good cash manager, it is important to possess certain key qualities. To carry out this work, the cash manager must:
- Have analytical skills that will enable him to analyze complex financial data;
- Be precise in detecting and avoiding errors that can have serious consequences for the company;
- Know how to manage your time by working under pressure with tight deadlines;
- A have a good understanding of financial risks and design strategies to minimize them;
- Know how to communicate because there are many interlocutors in the company: his team, the other departments of the company, external partners, etc.