Cash Management

Cash Management

Cash management is the process of monitoring, optimizing, and controlling cash inflows and outflows to maintain liquidity, meet obligations, and support investment and growth decisions. It applies to both individuals and businesses and is central to financial stability.

Key takeaways

• Effective cash management preserves liquidity and reduces the risk of insolvency.
• Businesses typically assign cash-management responsibilities to treasurers, CFOs, or external service providers.
• Individuals can use cash management accounts to consolidate checking, savings, and investment functions.
• Regular use of cash flow statements and solvency/liquidity ratios helps track financial health.
• Improving accounts receivable (AR) and accounts payable (AP) processes often produces the biggest short-term cash improvements.

Cash management solutions

For businesses:
* Treasury functions: forecasting cash needs, scheduling payments, managing credit lines, and investing short-term surpluses.
* Outsourcing: third-party providers can handle collections, payments, and liquidity services.
For individuals:
* Cash management accounts that combine checking, savings, and brokerage services.
* Money market accounts that often provide higher yields while retaining check-writing or debit privileges.

Corporate cash flow reporting

The cash flow statement is the primary tool for tracking a company’s cash position. It is typically divided into three sections:
* Operating activities — cash from core business operations (impacted by changes in working capital).
* Investing activities — cash used for or generated by investments in assets.
* Financing activities — cash flows related to borrowing, repaying debt, and equity transactions.

Key items tracked include cash collected from AR, cash paid for AP, investing outflows, and financing inflows/outflows. The statement’s net result shows the change in readily available cash.

Internal controls for cash flow

Internal controls help ensure accurate reporting and protect cash. Important controls and practices include:
* Clear collection procedures and defined AR aging policies.
* Segregation of duties for collections, disbursements, and reconciliations.
* Timely write-off policies for uncollectible receivables.
* Management of credit lines and contingency liquidity.
* Policies for investing idle cash (risk, return, and maturity limits).
* Compliance and reporting controls to meet regulatory requirements.

Managing working capital

Working capital = current assets − current liabilities. It affects operating cash flow:
* Current assets: cash, AR expected within one year, inventory.
* Current liabilities: AP due within one year, short-term debt.
Changes in working capital are reported in operating cash flows. A positive net change (increasing current assets relative to liabilities) typically increases usable cash; a negative change can reduce cash available for operations.

Liquidity and solvency ratios

Monitoring liquidity and solvency ratios helps assess short- and long-term financial health.

Common ratios:
* Quick ratio = (Cash equivalents + Marketable securities + Accounts receivable) ÷ Current liabilities
* Current ratio = Current assets ÷ Current liabilities

Higher ratios generally indicate stronger ability to meet short-term obligations.

Improving AR and AP efficiency

Practical steps to improve cash conversion:
* Shorten invoice cycles and enforce timely billing.
* Offer discounts for early payment to encourage faster AR turnover.
* Extend AP terms strategically without harming supplier relationships.
* Automate payables (electronic invoicing, scheduled payments) to capture early-payment discounts and reduce errors.
* Use direct deposit for payroll and electronic vendor payments to reduce processing time.

Are cash management accounts insured?

Insurance depends on the account type:
* FDIC insures deposits at banks up to allowable limits.
* SIPC protects customers of brokerage firms if the firm fails, primarily covering missing securities and limited cash held in brokerage accounts.
Check account terms and the institution’s coverage to understand protections.

Conclusion

Cash management is a continuous, active process that aligns day-to-day cash operations with strategic goals. Regular forecasting, disciplined controls, efficient AR/AP practices, and monitoring of cash flow statements and liquidity ratios are the core steps organizations and individuals can take to maintain liquidity, reduce risk, and enable growth.