Cash management refers to an entire field of financial management dealing with the allocation, management, and utilization of funds. It includes assessing current cash inflows, cash flows, and capital investments. In addition, it also involves evaluating future cash requirements, as well as looking for opportunities for improving the allocation of funds. It is therefore important for management of cash to identify the objectives before starting the process of implementing a strategy. The management objective depends on the type of cash that are needed, the interest rates, the availability of credit, etc. All these factors are crucial in determining the final management strategy.
The concept of cash management is not just limited to banks. It is also applicable in non-banking financial institutions such as hospitals, colleges, international organizations, etc. The concept is therefore not at a new frontier, but has been around for a long time. The most important components of cash management are the bank account, the treasury accounts, the banking system, the borrower accounts, and the government.
The idea of cash management refers to the management of financial flows by using financial instruments. These financial instruments could be bonds, stocks, derivatives, foreign currency, and so on. The term liquidity implies the ability of a firm to take delivery of payments. Thus, cash flows refer to the ability of a financial instrument, like a bond, to be converted into cash.
The major objective of cash management is to improve the liquidity of banking assets. In fact, a company’s liquidity depends on its balance sheet. This balance sheet shows the difference between assets and liabilities. A company with a large asset base and low liabilities will have high liquidity. On the other hand, a company with a large debt and poor assets will have low liquidity.
Cash management has two major objectives namely, improving liquidity and reducing risk. It helps in improving liquidity as well as reducing the risk by changing the liabilities and assets held. One can think of it in terms of three stages. At first stage, the cash is being managed to meet the short-term obligations and forecasts for cash collections. During this stage, there is no real decision to change the investment portfolio. But this does not mean that future contingencies do not exist.
Once the initial planning is done, one must always plan to have a steady source of cash for meeting various contingency situations such as unplanned for expenses, loss of profits, credit issues, adverse weather conditions etc. There are different types of cash management available depending upon the type of institution, its size, purpose and so on. The different types of options include:
A company’s cash management can be broken down into three major segments: savings, investment banking, and commercial banking. In addition, one can include the money market funds, government funds, corporate bonds, corporate savings accounts, credit unsecured loans and so on. As far as the nature of the business is concerned, it is better to keep it simple and keep some cash for meeting emergencies and expenses. However, as far as assets and property is concerned, it is better to have a separate category for that purpose.
Business organizations can perform cash management activities through three distinct channels. The main channels are: banks, financial institutions and brokers. For small enterprises, it is advisable to rely on banks as their services include direct access to the customers and offer the best possible interest rates and various other financial assistance. However, for large businesses, financial institutions would be a better option since they offer reliable cash management services along with a host of other risk management programs.