Cash Management- Definition, Importance, and Functions

Cash management as it mentions is the optimal use of money to make maximum liquidity and earnings. It refers to the accurate collection, dispensation, and investment of money.

• Importance of cash monitoring
• Functions of cash management
• Supply management
• Receivables Monitoring
• Payables Management
• Projecting
• Short-term financial investments
• Other functions

For a small business, the proper usage of money ensures solvency. Hence, money management is an important business function; it is a function that manages the collection and use of money.

Now let’s look at the Importance of Money Management 

Similar to a ‘no money circumstance’ in our everyday lives can be a headache, for an organization, it can be ravaging. Specifically for small companies, it can lead to a point of no return. It impacts the credibility of the business as well as can lead to them shutting down. For this reason, one of the most crucial jobs for the manager is to take care of cash.

Management requires to guarantee that there is adequate cash to fulfill the current commitments while making sure that there are no idle funds. This is essential as services depend on the recovery of receivables. If a financial obligation transforms negative (irrecoverable financial obligation) it can threaten the capital. Consequently, cash management is about being aware and  making adequate stipulations for contingencies like bad debts, financial slowdown, etc

Functions of Money Monitoring

In a suitable scenario, a company ought to be able to match its cash inflows to its money outflows. Cash inflows majorly consist of receivable and cash outflows majorly include account payables.

Practically, while cash outflows like settlement to vendors, operational expenses, settlement to regulators are specific, however, money inflows can be complicated. So the functions of cash management can be discussed as follows:

Supply Management

Greater stock in hand implies trapped sales and trapped sales indicate lesser liquidity. For this reason, a company has to aim at faster stock out to guarantee the movement of cash.

Receivables Management

A company raises invoices for its sales. In these instances, the credit report period for receiving the cash can range between 30– 90 days. Here, the company has recorded the sales but has not yet received cash for the transactions.

So the cash management feature will make a certain faster recovery of receivables to prevent a money problem. If the average time for recovery is shorter, the organization will certainly have sufficient cash to make its settlements. Timely settlements ensure lesser costs (rate of interests, charges) to the company.

Receivables management includes a robust mechanism for follow-ups. This will certainly make sure faster recovery and helps the business to forecast uncollectable bills and unanticipated situations.

Payables Management

While receivables management is among the key areas in the cash management function, payables management is also important. Payables develop when the organization has made acquisitions on debt and needs to pay for the very same within a set time.

An organization can take short-term credit from banks as well as financial institutions. Nonetheless, these credit history centers come at an expense and as a result, a company should make sure that they maintain a good liquidity position; this will certainly assist in prompt payments of financial obligations.

Forecasting

While preparing financial investments, the managers need to be careful as they need to plan for future contingencies as well as likewise make certain success. For this, they have to utilize reliable projecting and also monitoring tools. When the money inflows and also outflows are efficiently handled it provides the firm excellent liquidity.

Short-term Investments

Preventing cash crisis, insolvency, and ensuring economic stability are the primary criteria of cash administration. But it is similarly vital to spend the surplus cash in hand wisely. Regardless of being a fluid asset, idle cash does not generate any returns. While investing in short-term financial investments a company has to make certain liquidity and optimum returns. Consequently, this decision needs to be taken carefully. The quantum/amount of investment needs to be calculated and also made a decision thoroughly. This caution is required because a company can not invest all the offered funds. Companies need to schedule cash for backups (cash on hand too) as well.

Other features

Money management consists of monitoring of bank account, taking care of web banking, merging and also netting of assets, etc. So the cash administration for the treasury can additionally be a core feature. Although for large corporates this function is managed by software programs, small businesses have to check it manually and make sure liquidity at all times. To add, huge businesses have accessibility to credit score facilities at affordable rates. For a small business that access is not readily available. Consequently, cash management is essential to them. Nevertheless, also large companies require to monitor their systems time and again to stay clear of a circumstance of bankruptcy.

Bottomline

We have covered all the points listed at the beginning of this article. If you have any queries, doubts or you have suggestions as to which topics you would want us to write the next article about, feel free to comment down below. You can also visit our blog section, in case you interested in other SAP cash management topics. 

I hope that by now you have had an overview of SAP Cash Management. Before you enroll in ZaranTech’s certification course on SAP Cash Management Powered by HANA, do check out the tutorial for Beginners: