50% of businesses fail within five years of operation because of poor cash flow management. Every small or big business needs cash to operate and maintain its liquidity. With a healthy cash flow, your business can pay debts on time and maintain all its operations.
Cash management is important for keeping your business afloat as well as overseeing its growth and expansion. It typically involves managing money coming in and out of your business.
So, how are you managing cash in your business? This article defines cash management, how it works, and why it’s important.
What Is Cash Management?
Cash management is the day-to-day management of cash inflows and outflows. Whether it's an individual or an organization, the daily cash management challenge is how you manage your accounts receivables and accounts payables.
Managing cash involves collecting, controlling, handling, and investing the organization’s cash to ensure maximum utilization of available resources. If your company can take care of these processes successfully, it will gain financial stability.
The good news is that there are different cash management solutions that can help businesses get the best returns on their cash and achieve financial stability.
How Cash Management Works
They say cash is king in business. Every business or organization needs cash to run its operations. Good cash management helps businesses improve their financial stability and grow.
If a business successfully manages cash inflows and outflows, it will meet payment obligations, achieve its goals, and maintain business stability.
This only works if different individuals directly involved in cash affairs, such as the corporate treasurers, business managers, and chief financial officers (CFOs), work in harmony.
These individuals are directly involved in the day-to-day activities involving cash and always oversee cash management. Without their authorization, no cash can go out or inside the business.
Even if the company outsources some of its cash management obligations, these executives must analyze every aspect of cash management.
Why Is Cash Management Important for Business?
Proper cash management is a key component of creating and maintaining a business’s financial stability. Cash is a key asset for any business, and proper management will help maximize earnings. With maximum earnings, a business can rest assured that its future growth is well taken care of.
In simple terms, proper cash management is important for your business's growth and stability. Some of the things your business can achieve when it properly manages its cash include:
1. Avoid Cessation of Payments
Cessation of payments happens when your business owes money, but its current assets cannot meet the payment demands.
Businesses that reach this point probably had poor cash management in the past. When a business cannot settle its creditors, it’s clearly on the verge of closure.
Managing your company cash properly can save your business from finding itself in a situation where creditors are on its back. Your business must have a clear understanding of cash flows and set up regular monitoring of how cash works.
In case of any cash gaps or irregularities, the concerned parties can identify them on time and take appropriate measures.
2. Save Money
A successful business knows how to save money while maximizing profits. What’s coming in for your business should be more than what’s going out if you want to maintain stability.
Saving money on things like bank charges such as interest on loans, commissions, and overdraft fees is just one example of money saving. Maintaining an overview of cash flow helps the executive identify different money-saving opportunities and utilize them effectively.
They will also identify when they need to finance cash flow and put less expensive expenditures in place to save money.
3. Allocate Surplus Cash
Many businesses dread falling short of cash as this means they won’t pay debts, employees, or suppliers. While not being able to meet your financial obligations can be stressful, having too much cash at your disposal is also a problem.
A cash surplus means that your business is not making good investment decisions.
A business that has too much cash is missing opportunities to invest and generate more profit. Holding too much money and liquid assets is an indication of a business that is stuck in one place despite being in a good position to expand.
The best thing to do is invest the surplus funds and borrow the money it needs for various activities. If your business has a cash surplus, you should know that banks have various products where you can allocate the excess cash.
Look at these products in terms of long-term profit, investment financing, or unforeseen expenses.
4. Ensure Sustainable Growth
Every business plans to grow and expand its operations. For the business to achieve these goals, it needs good cash flow. Every personnel, plant, and premise needs good financial investment.
Even with good financial stability, a business can’t just wake up and decide to open a branch without a proper plan. The executives must devise a proper plan for everything needed for the expansion.
They must plan how they will allocate funds to specific projects and how much the business will spend.
Cash management is an important aspect of running any business. Cash is an important asset and should never be overlooked as far as the day-to-day running and future plans of the business are concerned. Good cash management balances the money coming in and going out of the business.
If your business is yet to set up good cash management in place, working with financial experts can offer the needed help. They can help you discover what your business needs for proper cash management and develop an important plan for managing your company finances