The functions of cash management start when a customer writes cheques to pay the firm on its account receivable. Cash inflows majorly include account receivables and cash outflows majorly include account payables. The function ends when a supplier, an employee or the government realizes funds from the firm on an account payable or accruals. The basic issue of cash management is to enable a firm to maintain sufficient liquidity and also at the same time improve its profitability.
So the functions of cash management can be explained as follows :
- Inventory management: Higher stock in hand means trapped sales and trapped sales means less liquidity. Hence, an organization must aim at faster stock out to ensure the movement of cash.
- Receivables Management: An organization raises invoices for its sales. So the cash management function will ensure faster recovery of receivables to avoid a cash crunch.
- Payables Management: While receivables management is one of the primary areas in the cash management function, payables management is also important.
If cash flows were accurately predicted, the firm would not have to give much attention to the management of cash. Cash outflows to some extent are certain but cash inflows cannot be predicted accurately. There is no perfect synchronization between cash inflows and cash outflows. Sometimes, cash outflows exceed cash inflows due to an unusual payment of the obligation and non-seasonal build up in inventories and receivables.
To overcome the uncertainty about cash flow prediction and to maintain coincidence in cash inflow and outflow, the firm’s cash management function should consist of the following strategies:
- Turn over inventory as quickly as possible, avoiding stock-out that may result in a loss of sales.
- Pay accounts payable as late as possible without deteriorating the firm’s credibility, but take advantage of any favorable cash discount.
- Collect account receivables as quickly as possible without losing future sales due to high-pressure collection techniques. Cash discounts, if any are economically justifiable, may be used to accomplish this objective.
- Involve in cash planning to determine deficit or surplus cash in each period.
- Surplus cash must be invested in marketable securities.