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JOSEPHINE P. JIMENEZ
Master in Business Administration
Financial Management

Cash Management

Cash management is the efficient collection, disbursement, and investment of cash in an

In corporate cash management, also often known as treasury management, business managers,
corporate treasurers, and chief financial officers are typically the main individuals responsible
for overall cash management strategies, cash related responsibilities, and stability analysis.

Cash management is a broad term that refers to the collection, concentration, and disbursement
of cash. The goal is to manage the cash balances of an enterprise in such a way as to maximize
the availability of cash not invested in fixed assets or inventories and to do so in such a way as to
avoid the risk of insolvency. Factors monitored as a part of cash management include a
company's level of liquidity, its management of cash balances, and its short-term investment
strategies.

Motives for Holding Cash

The motives for Holding Cash is simple, the cash inflows and outflows are not well synchronized,
i.e. sometimes the cash inflows are more than the cash outflows while at other times the cash
outflows could be more. Hence, the cash is held by the firms to meet the certain as well as
uncertain situations.

Three Motives why firm holds cash

1. Transaction Motive: Refers to the cash required by a firm to meet the day to day needs
of its business operations. Like; cash to make the payments in the form of salaries,
wages, interests, dividends, goods purchased, etc.
Likewise, it also receives cash from its sales, debtors, investments. Often the firm’s cash
inflows and outflows do not match, and hence, the cash is held up to meet its routine
commitments.
1. Precautionary Motive: Refers to the tendency of a firm to hold cash, to meet the
contingencies or unforeseen circumstances arising in the course of business. Such as an
increase in the price of raw materials, labor strike, lockouts, change in the demand, etc.
Thus, in order to meet with these uncertainties, the cash is held by the firms to have an
uninterrupted business operation.
2. Speculative Motive: The firms hold cash for the speculative purposes to avail the benefit
of bargain purchases that may arise in the future. For example, if the firm feels the prices
of raw material are likely to fall in the future, it will hold cash and wait till the prices
actually fall.
A firm holds cash to exploit the possible opportunities that are out of the normal course
of business. These opportunities could be in the form of the low-interest rate charged on
the borrowed funds, expected fall in the raw material prices or favorable change in the
government policies.

Cash Flow Management

Cash flow management is the process of tracking how much money is coming into and going
out of your business. This helps you predict how much money will be available to your business
in the future. It also helps you identify how much money your business needs to cover debts,
like paying staff and suppliers.

Careful cash flow management allows a company to estimate the amount of cash that it will
have on hand at any one time, project trends in cash inflow and cash outflow, and evaluate
whether a shortfall or surplus in cash could potentially occur.

Importance of Cash Flow Management

1. Solvency & Credit worthiness – Steady cash flows lead to better credibility and
opportunity for foreign investment. It also leads to ease of raising fund.
2. Enabling Capex and Investment – Surplus funds should be invested to reap future
returns.
3. Boosts Vendor and Employee relations – Smooth flow of receivables and payables
resulting to mutual trust between the business and the suppliers, timely payment of
salary to employees.
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Strategies to Maintain a Stable Cash Flow

1. Master your budget. Proper budgeting ensures that you’re not pushing your business
into the red because of overspending.
2. Learn to spot cash flow trends. You can use them to gauge your cash flow position at
any given time, based on your business’s historical performance.
3. Evaluate your spending categories. Getting comfortable with budgeting is important
because it makes it easier to scrutinize your spending more closely. Being able to group
certain expenses together is helpful for understanding how those expenses are
benefitting your business.
4. Reduce expenses where possible. If your cash flow statement shows a deficit, finding
ways to plug spending leaks is a necessity. While some expenses, such as your rent or
debt payments, may not be negotiable, you may find that you have some wiggle room
in other areas.
5. Monitor your pending invoices and payments. Knowing when you can expect money
to flow into the business and in what amount can help you better estimate your cash
flow position. At the same time, you should be mindful of when your expenses must be
paid in order to ensure that there’s enough of an overlap so that nothing falls through
the cracks.

Optimizing Cash Balances

Cash is the lifeline of your business. Managed well, your company grows and remains stable,
but managed poorly, the impact could be devastating. Proper cash forecasting and
optimization enables you to maximize operational efficiency and lessen risk.

It’s never been more important to predict, manage and optimize your cash flow. Forecasting
cash can be difficult, but it is possible to significantly improve your forecasts without incurring
costs. Technology can help you streamline the process, but it is important to have the right
processes in place.

What does optimizing your cash entail?

 Establish cash certainty: Most importantly, cash optimization means no more “best-
guess” forecasts based on questionable data, taken from error-strewn spreadsheets.
Companies need to know exactly what cash they have, and where they hold it. Treasury
teams need to be able to make accurate, long-range cash balance forecasts, confident in
the knowledge that their predictions will hold firm.
 Make effective financial decisions: With full confidence in the cash position and forecast,
treasury teams can be decisive in their decision-making. Instead of leaving cash reserves
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sitting idle in bank accounts, by having detailed knowledge of the organization’s current
and future balance, treasury teams have the power to put the organization’s cash to work
in the most efficient manner.
 Enable payments: Organizations make countless payments each day, often from multiple
banks around the country or even globally. Whether it’s ensuring the organization has
enough liquidity to make its payments in a timely manner, or setting up a payment factory
to streamline processes and minimize banking fees, optimizing their cash enables
organizations to manage their payments processes in an efficient, worry-free manner.

Tips for Optimizing Cash Flow

1. Align payment terms for payables and receivables. If creditors are demanding payables in
30 days and customers are paying you in 45, you will run out of money. Follow up promptly on
past due accounts. Structure agreements to include supplier discounts for early payment, and
establish an interest charge policy for late payments by customers.

2. Plan your cash needs for the next quarter, year and several years out. If you foresee
problems, look into extending lines of credit, increasing overdraft protection or applying for a
business loan.

3. Determine your biggest expenses (e.g. cost of sales, cost of goods, shipping) and look
for ways to reduce costs by negotiating with suppliers or putting jobs out for tender.

4. Watch your payroll costs. Staff according to your current needs and add more bodies when
sales grow. It is better to work extra hours in the early stages and invest in additional people
after the infrastructure is built.

5. Check your occupancy costs. Pare your utilities, phone services, etc. to the basics and keep
your physical footprint to a minimum. Consider alternatives such as reducing space or letting
people work from home. Segment your customers based on their profitability. Determine the
costs for servicing them and focus on the most profitable.

6. Evaluate your tax situation and ensure you have the right structure in place to optimize
after-tax income.

7. Diversify your customer base so you aren’t relying on a single source for revenues.

8. Establish policies for managing cash, including mail handling, online banking procedures,
cheque authorizations, reconciliation schedules, etc.

9. Network with peers. They can be an invaluable resource for sharing experiences.
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Companies that succeed in good cash forecasting improve decision making. Getting results
requires not only accurate identification of opportunities, but also effective implementation
of treasury operations.

References:

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