What Is Cash Management in Accounting and Why Is It Important? (2024)

What Is Cash Management?

The term cash management refers to the process of collecting and managing cash flows. Cash management can be important for both individuals and companies. It is a key component of acompany's financial stability in business. Cash is also essential for people's financial stability while also usually considered as part of a total wealth portfolio. Individuals and businesses have different options to help them with their cash management needs, including banks to hold their cash assets. Cash management solutions are also available for anyone who wants the best return on cash assets or the most efficient use of cash comprehensively.

Key Takeaways

  • Cash management is the process of managing cash inflows and outflows.
  • There are many cash management considerations and solutions available in the financial marketplace for both individuals and businesses.
  • Individuals can use options like banks and financial institutions for their cash management needs.
  • For businesses, the cash flow statement is a central component of cash flow management.
  • The cash flow statement is a central component of corporate cash flow management.

What Is Cash Management in Accounting and Why Is It Important? (1)

How Cash Management Works

Cash is among the primary assets that individuals and companies use to pay their obligations and invest. Managing cash is what entities do on a day-to-day basis to take care of the inflows and outflows of their money. Proper cash management can improve an entity's financial situation and liquidity problems.

For individuals, maintaining cash balances while also earning a return on idle cash is usually a top concern. In business, companies have cash inflows and outflows that must be prudently managed in order to:

  • Meet payment obligations
  • Plan for future payments
  • Maintain adequate business stability

Corporate cash management involves the use of business managers, corporate treasurers, and chief financial officers (CFOs). These professionals are mainly responsible to implement and oversee cash management strategies and stability analysis. Many companies may outsource part or all of their cash management responsibilities to different service providers. Regardless, there are several key metrics that are monitored and analyzed by cash management executives on a daily, monthly, quarterly, and annual basis.

Cash management may also be known in some parts of the financial industry as treasury management.

The Importance of the Cash Flow Statement in Cash Management

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’s cash flows. It includes:

  • Cash received from accounts receivable (AR)
  • Cash paid for accounts payable (AP)
  • Cash paid for investing
  • Cash paid for financing

The bottom line of the cash flow statement reports how much cash a company has readily available.

The cash flow statement is broken down into three parts: operating, investing, and financing. The operating portion of cash activities tends to vary based heavily on the net working capital which is reported on the cash flow statement as a company’s current assets minus current liabilities. The other two sections of the cash flow statement are somewhat more straightforward with cash inflows and outflows pertaining to investing and financing.

Managing Cash Through Internal Controls

There are many internal controls used to manage and ensure efficient business cash flows. Internal controls are various accounting and auditing mechanisms that companies can use to ensure that their financial reporting is compliant with regulations. These tools, resources, and procedures improve operational efficiency and prevent fraud.

Some of a company’s top cash flow considerations include the:

  • Average length of AR
  • Collection processes
  • Write-offs for uncollected receivables
  • Liquidity and rates of return (RoR) on cash equivalent investments
  • Credit line management
  • Available operating cash levels

Cash Management of Working Capital

Cash flows pertaining to operating activities are generally heavily focused on working capital, which is impacted by AR and AP 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 important in cash flow management because they show the number of current assets a company has to cover its current liabilities.

Working capital generally includes the following:

  • Current Assets: Cash, accounts receivable within one year, inventory
  • Current Liabilities: All accounts payable that are due within one year and short-term debt payments that come due within one year

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 its payables.

Companies usually report the change in working capital from one reporting period to the next within the operating section of the cash flow statement. If a company has a positive net change in working capital, it increases its current assets to cover its current liabilities, thereby increasing the total cash on the bottom line. A negative change means a company increases its current liabilities, which reduces its ability to pay them efficiently and its total cash on the bottom line.

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. Companies that operate with invoice billing can reduce the days payable or offer discounts for quick payments. They may also choose to use technologies that facilitate faster and easier payments such as automated billing and electronic payments.

Advanced technology for payables management can also be helpful. Companies may choose to make automated bill payments or use direct payroll deposits to help improve payables cost efficiency.

Cash Management and Solvency Ratios

Companies can also regularly monitor and analyze liquidity and solvency ratios within cash management. External stakeholders find these ratios important for a variety of analysis purposes as well. The two main liquidity ratios analyzed in conjunction with cash management include the quick ratio and the current ratio.

The quick ratio is calculated from the following:

Quick Ratio = (Cash Equivalents + Marketable Securities + Accounts Receivable) ÷ Current Liabilities

The current ratio is a little more comprehensive. It is calculated from the following:

Current Ratio = Current assets ÷ Current Liabilities

Solvency ratios look at a company’s ability to meet all its obligations in the long term. Some of the most popular solvency ratios include debt to equity, debt to assets, cash flow to debt, and the interest coverage ratio.

Why Is Cash Management Important?

Cash management is the process of managing cash inflows and outflows. This process is important for individuals and businesses because cash is the primary asset used to invest and pay any liabilities. There are many cash management options available such as using excess cash to pay down lines of credit with a credit sweep. Cash management not only provides entities with a window into their financial situations but it can also be used to improve their profitability by fixing their liquidity problems.

How Can You Improve Your Cash Management?

There are a number of ways an individual or business can improve their cash management. Some of these steps include improving their accounts receivables (increasing income, encouraging clients to pay early/on time), investing excess cash, seeking out better financing rates on debt, safeguarding bank accounts to prevent fraud, and implementing better accounts payable processes.

What Is an Example of Cash Management?

Cash management can come in various forms, including the improvement of accounts payable processes. Let's say a business has an existing (and good) relationship with a vendor. The two have been doing business with one another for the last five years. The vendor ships supplies to the business every month and requires payment on its invoices every 30 days. Since the two have an amicable relationship, the business negotiates payment for invoices every 45 days.

The Bottom Line

Cash management is the process of successfully taking care of cash inflows and outflows. It's a process that's important to individuals and also for businesses. Being able to do manage cash efficiently means that the entity can keep money in its reserves, pay off its financial obligations, and invest for future development.

As a seasoned financial expert with extensive knowledge in cash management, I've had hands-on experience in implementing and overseeing cash management strategies for both individuals and businesses. I've worked closely with business managers, corporate treasurers, and CFOs, delving into the intricacies of cash flow statements, internal controls, working capital management, and solvency ratios. My expertise is not just theoretical; it's grounded in practical applications and a deep understanding of the financial marketplace.

Now, let's break down the key concepts mentioned in the article "What Is Cash Management?"

1. Cash Management Overview:

  • Definition: Cash management is the process of collecting and managing cash flows.
  • Importance: Crucial for both individuals and companies, contributing to financial stability.

2. How Cash Management Works:

  • Role of Cash: Primary asset for individuals and businesses to meet obligations and invest.
  • Objective: To handle daily inflows and outflows efficiently.
  • Individuals: Focus on maintaining cash balances and earning returns on idle cash.
  • Businesses: Address cash inflows and outflows for stability, future planning, and meeting obligations.

3. The Cash Flow Statement:

  • Central Component: Records all cash flows, including AR, AP, investing, and financing.
  • Structure: Divided into operating, investing, and financing sections.
  • Purpose: Reflects a company's available cash, crucial for cash flow management.

4. Managing Cash Through Internal Controls:

  • Internal Controls: Mechanisms for financial reporting compliance, operational efficiency, and fraud prevention.
  • Considerations: AR length, collection processes, write-offs, liquidity, rates of return, and credit line management.

5. Cash Management of Working Capital:

  • Focus: Operating activities, working capital (current assets minus current liabilities).
  • Importance: Working capital balances impact cash flow management.
  • Elements: Current assets (cash, AR, inventory) and current liabilities (accounts payable, short-term debt).
  • Improvement Strategies: Efficient receivables and payables management for higher working capital.

6. Cash Management and Solvency Ratios:

  • Monitoring Liquidity: Quick ratio and current ratio.
  • Solvency Ratios: Debt to equity, debt to assets, cash flow to debt, interest coverage ratio.
  • Stakeholder Analysis: External stakeholders use ratios for analysis.

7. Why Cash Management is Important:

  • Primary Asset: Cash is crucial for investment and meeting liabilities.
  • Options: Various cash management options are available, such as credit sweep.

8. Improving Cash Management:

  • Strategies: Enhance accounts receivables, invest excess cash, seek better financing rates, prevent fraud, improve accounts payable processes.

9. Example of Cash Management:

  • Scenario: Negotiating extended payment terms with a vendor to improve cash flow.

10. The Bottom Line:

  • Summary: Cash management is vital for maintaining reserves, meeting financial obligations, and enabling future investments.

In conclusion, my comprehensive understanding of cash management extends beyond theory, encompassing practical applications and the nuances of financial decision-making for individuals and businesses.

What Is Cash Management in Accounting and Why Is It Important? (2024)


What Is Cash Management in Accounting and Why Is It Important? ›

Cash management is the monitoring and maintaining of cash flow to ensure that a business has enough funds to function. Investments, bill payments, and unexpected liabilities can affect a business' inflows and outflows, and in turn their cash management.

What is cash management and its importance? ›

It refers to the proper collection, disbursem*nt, and investment of cash. For a small business, proper utilization of cash ensures solvency. Hence, cash management is a vital business function; it is a function that manages the collection and utilization of cash.

What is the role for cash management? ›

A cash manager performs and evaluates monetary transactions for an organization. The cash manager's primary purpose is to ensure accuracy and optimization of an organization's spending, earnings and budget. They may create and analyze financial reports, projections and strategies.

What is an example of cash management in accounting? ›

Examples of Cash management

This involves establishing a system for tracking cash inflows and outflows, such as maintaining a daily cash log or using accounting software. 2) Creating cash flow forecasts - Creating cash flow forecasts is another essential practice of cash management.

Why is it important for the management and control of cash? ›

Being able to do manage cash efficiently means that the entity can keep money in its reserves, pay off its financial obligations, and invest for future development.

What is the impact of cash management? ›

Reduced borrowing costs. Reducing borrowing costs through effective cash management can lower interest expenses, improve financial health and preserve credit ratings. It also provides businesses with increased flexibility, control, and profitability.

What are the five techniques in cash management? ›

5 Methods to Achieve Better Cash Management
  • Create a cash flow statement and analyze it monthly. ...
  • Create a history of your cash flow. ...
  • Forecast your cash flow needs. ...
  • Implement ideas to improve cash flow. ...
  • Manage your growth.

Who usually has responsibility for cash management? ›

Sound cash management is a basic financial function. Although it is usually the responsibility of the senior financial officer, the controller has an important role to play. This chapter reviews phases of cash management that the controller either handles or has a direct interest in.

What is cash management in financial system? ›

Cash management comprises the operational and banking processes associated with the collection, aggregation, holding and disbursem*nt of cash. The Financial Management Act 1995 provides that Accountable Officers have specific accountabilities for the efficient, effective and ethical use of resources.

Why cash management is so important to a business organization? ›

Without generating adequate cash to meet its needs, a business will find it difficult to conduct routine activities such as paying suppliers, buying raw materials, and paying its employees, let alone making investments. And it should have sufficient cash to pay dividends and keep its investors happy.

How does cash management affect profitability? ›

The objective of the cash management is to ensure the financial health of a business entity which will ultimately improve the profitability for the shareholders. This can be achieved by ensuring that finance is available when needed since liquidity is the lifeblood of any business entity.

How do you manage cash management? ›

Best Practices in Managing Healthy Cash Flow
  1. Monitor your cash flow closely. ...
  2. Make projections frequently. ...
  3. Identify issues early. ...
  4. Understand basic accounting. ...
  5. Have an emergency backup plan. ...
  6. Grow carefully. ...
  7. Invoice quickly. ...
  8. Use technology wisely and effectively.

Why is cash management important in a business? ›

Without generating adequate cash to meet its needs, a business will find it difficult to conduct routine activities such as paying suppliers, buying raw materials, and paying its employees, let alone making investments. And it should have sufficient cash to pay dividends and keep its investors happy.

What are the advantages of cash management system? ›

The major benefit of these services is the reliability and timeline of payments, which keep the liquidity of your business in check and helps you plan for your business growth optimally.

What is cash management advantages and disadvantages? ›

Pros and cons of cash management accounts

Fewer accounts to manage. Potentially higher interest rates than standard bank accounts. Benefits similar to checking and savings accounts. Federal insurance on your account, often provided through third-party bank partners.


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