Cash flow Management

Cash management is the process of collecting and managing cash flows. Cash management is important for both individuals and companies.

Proper cash management is a key component to financial stability and total wealth portfolio growth and or management.

Cash is the primary asset individuals and companies use to pay their obligations on a regular basis. In business, companies have a multitude of cash inflows and outflows that must be prudently managed in order to meet payment obligations, plan for future payments, and maintain adequate business stability. For individuals, maintaining cash balances while also earning a return on idle cash are usually top concerns.

Individuals and businesses have a wide range of options available across the financial marketplace to help with all types of cash management needs.

Banks are typically a primary financial service provider for the custody of cash assets. There are also many different cash management solutions for individuals and businesses seeking to obtain the best return on cash assets or the most efficient use of cash comprehensively, there are firms that will financial management skills as well develop templates that can help an organization in planning their cash management like us.

In treasury management or what is commonly referred to as Corporate Finance; business managers, corporate treasurers, and chief financial officers are the people responsible for overall cash management strategies, cash related responsibilities, and stability analysis, they delegate what is necessary of course but the decision making on what happens where, when and how much solely lies on them. There are several key metrics that are monitored and analyzed by cash management executives on a daily, monthly, quarterly, and annual basis to ensure they are well informed in their decision making, timely, and accurately.

The cash flow statement is a central component of corporate cash flow management. While it is often transparently reported to stakeholders on a quarterly basis, parts of it are usually maintained and tracked internally on a daily basis. The cash flow statement comprehensively records all of a business’ cash flows. It includes cash received from accounts receivable, cash paid for accounts payable, cash paid for investing, and cash paid for financing. In summary, the cash flow statement reports how much cash a company has readily available.

There are many internal controls used to manage and ensure efficient corporate cash flows. Some of a company’s top cash-flow considerations include but not limited to the average length of account receivables, collection processes, write-offs for uncollected receivables, liquidity and rates of return on cash equivalent investments, credit line management, and available operating cash levels. In general, cash flows pertaining to operating activities will be heavily focused on working capital which is impacted by accounts receivable and accounts payable changes. Investing and financing cash flows are usually extraordinary cash events that involve special procedures for funds.

A company’s working capital is the result of its current assets minus current liabilities. Working capital balances are an important part of cash flow management because they show the number of current assets a company has to cover its current liabilities. Companies strive to have current asset balances that exceed current liability balances. If current liabilities exceed current assets a company would likely need to access its reserve lines for payables. No company wants to in this situation as it reflects badly on their cash management skills in as much this situation may at times be caused by circumstances that could not be predicted, like a pandemic.

There are several things a company can do to improve both receivables and payables efficiency, ultimately leading to higher working capital and better operating cash flow.

This includes but not limited to:

i) A company operating with invoice billing can reduce the day’s payable or offer discounts for quick payments.

ii) A company may choose to use technologies that facilitate faster and easier payments such as automated billing and electronic payments.

iii) A company can use advanced technology for payables management as it has proven to be helpful as well.

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Mbugua & Associates.

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