Cash management is concerned with the management of cash in such a way as to achieve the generally accepted objectives of the firm- maximum profitability with maximum liquidity of the firm. It also includes the matters relating to financing of deficit and investment of surplus cash so as to maintain an optimum cash balance.
Cash management refers to a broad area of finance involving the collection, handling, and usage of cash. It involves assessing market liquidity, cash flow, and investments. It is the management’s ability to recognize cash problems before they arise, to solve them when they arise and has made the solution available to delegate someone carries them out.
Effective and efficient cash management is considered to be important for the following reasons:
- Cash management ensures that the firm has sufficient cash during peak times for purchase and for other purposes.
- Good cash management influences the efficiency of operations and reduces the overall cost of doing business.
- It helps to meet obligatory cash outflows when they fall due.
- It assists in planning capital expenditure projects.
- It helps to arrange for outside financing at favourable terms and conditions, if necessary.
- It helps to allow the firm to take advantage of a discount, special purchases and business opportunities.
- It helps to invest surplus cash for short or long-term periods to keep the idle funds fully employed.
- If you tie up cash in long term stock it is not available to invest in something short term with a good ROI.
- Using historical cash flow statements helps keep track of how money was used.
Businesses that have poor cash management can fall behind in debt and monthly operational expenses, making it extremely hard to recoup stability.