Cash Management – Overview, How It Works, Problems

From one’s wallet to the complex flow of money in a billion-dollar company, the position of cash management is one that cannot be undermined. Without careful organization and handling of one’s financial resources, one can quickly find oneself in the red. And thus, the importance of cash management. In this article, we look into an overview of cash management before diving into how it works, as well as the problems that can hinder an individual or organization from properly managing their cash.

An Overview

So, why is cash management such a critical component not only for big multinational companies but also for the individual? We’ll give you a hint. It’s the first word you read in this article. Cash is the key component in an organization that is frequently used in almost every sector of the company.

Therefore, a critical analysis of its inflow and outflow will probably determine the stability of a company. Therefore, in a nutshell, cash management can be defined as the process of managing the inflow and outflow of cash. It would also involve the strategies and solutions that the organization makes to keep afloat or stable.

How Cash Management Works

As explained above, cash management deals with the flow of money in and out. Therefore, a prudent step would be first to come with a record that will completely detail the flow of money in the company. Such a record comes in the form of a cash flow statement. It comprehensively records the organization’s money flow within a financial year.

The cash flow statement is typically divided into three parts: Financing, investing, and operating activities. The segment of operating activities gives us a feel of the company’s current assets, its current liabilities, and the working capital. Together with the records on financing and investing activities, one can derive the amount of cash available and what has been sunk into various assets for the company.

With the information contained within a cash flow statement, stakeholders can also make use of ratios that can help them analyze the cash operations of the company properly. This allows the managers as well as stockholders to look into the ability of the company from both a short-term and long-term perspective. An example of such a ratio is a solvency ratio which allows one to calculate the ability of the company to pay off its debts/ liabilities.

Common Cash Management Problems

  1. A lack of skills.

Cash management, in the end, focuses on your ability to make use of controls and skills … Read more