Money is the lifeblood of any business. To stay afloat and thrive, companies must maintain a steady stream of cash. This liquidity enables them to cover operational expenses, meet fixed costs, and seize investment opportunities. That’s why effective cash management and handling cash flow is crucial – it’s the cornerstone of financial stability.

In this guide, we’ll uncover the core principles of cash management and demonstrate how they drive success within a business.

Definition: cash management

The Gabler Business Lexicon defines cash management as “all measures related to short-term financial planning within a company.” While this might seem complicated, let’s simplify it:

Cash management is about controlling and optimizing your company’s cash flow. It helps you track the money coming in and going out, giving you a clear picture of your cash balance and how it affects your financial health.

Cash management: overview of accounts, inflows, and outflows

Companies meticulously track and manage liquid assets through inflows and outflows to ensure they maintain liquidity and keep operations smooth. The primary goal of cash management is to safeguard this liquidity – essentially, to ensure the business can continue running without interruptions. CFOs and treasury managers are key players in this process, overseeing cash flow and ensuring there are always adequate funds available.

Your cash flow is influenced by investments, bills, and expenses, all of which impact your cash management strategies. To operate efficiently and independently, a company needs a robust system that maximizes liquid assets and minimizes ongoing costs.

Cash management, liquidity management, treasury management

Cash management, often referred to as liquidity management or treasury management, fundamentally involves overseeing a company's financial resources. While there are nuanced differences between these terms, they all converge on the core task of effectively managing and optimizing a company’s cash flow.

Cash management and cash flow

Cash management hinges on a company's liquidity, which is essentially its cash flow. Cash flow tracks the movement of money within the business. Cash inflow consists of revenue and capital gains from customer payments for products or services. Conversely, cash outflow covers all costs and expenses necessary to sustain operations.

Successful cash management is closely tied to various aspects of cash flow, including:

• Cash Flow Monitoring
• Cash Flow Analysis
• Cash Burn Rate
• Cash Runway

Cash flow monitoring is essential for tracking every financial movement within your company. With cash flow analysis, you track cash and non-cash income and expenses over a set period. For loss-making startups, the cash burn is crucial. It reveals how quickly you are consuming your funds. This metric answers the key question: "How much money do I burn?" Additionally, the cash runway indicates how long your company can sustain itself based on its current funds and anticipated revenue. It answers the question: “How fast do I burn money?”

Cash flow statement for better overview

One of the essential tools in financial management is the cash flow statement. It meticulously tracks all transactions related to operating, investing, and financing cash flow, offering a comprehensive view of your cash inflows and outflows.

On a side note: With re:cap's cash management software, you can access a cash flow statement that accurately categorizes 97% of transactions from all bank accounts. This gives you a precise real-time overview of your cash flow.

How does cash management work?

Cash management provides a clear view of your available liquid assets – capital you can access immediately, not tied up in assets like machinery. It’s often referred to as cash reserves or cash position.

With effective cash management, you’ll know exactly how much money is in your accounts or tills, and track the flow of cash in and out of your business over time. This insight helps you stay on top of your financial position and make informed decisions.

Overview of a company's available liquid funds

You understand how your money flows and what’s available to you. This is just one aspect of cash management. To fully optimize your resources, focus on enhancing business operations, investments, and financing strategies. By doing so, you can maximize returns and minimize risks effectively.

Typically, companies have specialized teams for treasury and cash management. These responsibilities are usually overseen by management or the CFO.

These teams handle several tasks:

• Monitoring payments
• Controlling bank transactions
• Allocating resources
• Planning liquidity
• Balancing deficits
• Monitoring budgets and costs
• Managing, redistributing, or reinvesting surpluses

Managing cash effectively can be complex. With multiple bank accounts, diverse entities across countries, and thousands of transactions daily, the task demands rigorous oversight and optimization. Here’s how cash management software can streamline and enhance your processes.

The goals of cash management

Every company, based on its business model and stage of development, pursues distinct objectives. Common goals include:

1. Maintaining liquidity

Ensure your company can meet short-term obligations such as salaries, supplier payments, and other expenses at any time.

2. Optimizing cash flow

Efficient cash flow management prevents unnecessary capital constraints and allows for profitable investment of surplus funds.

3. Reducing financing costs

Smart cash management minimizes the need for external financing, thereby cutting down on interest expenses.

4. Avoiding liquidity shortages

Avoid cash shortages to prevent disruptions in meeting payment obligations, which can lead to serious financial and legal problems.

5. Investing surpluses

Put surplus liquidity to work by investing it short-term to earn additional income.

The importance of cash management

Effective cash management is crucial for maintaining liquidity and ensuring your business stays operational. Without it, meeting your financial obligations becomes difficult.

Every business needs a cash management strategy, whether it’s a simple Excel spreadsheet or advanced software. Cash continuously flows in and out of accounts, and the primary goal is to ensure that inflows exceed outflows, preventing your account from running dry and maintaining your desired cash balance.

The essence of cash management is to secure your company’s financial stability over the short and medium term. By strategically managing cash, you not only meet your obligations but also support revenue growth and enhance overall company performance.

Components of cash management

Cash management includes various components, such as:

• Liquidity or cash flow planning
• Cash forecasting
• Cash pooling
• Risk management
• Monitoring account balances and transactions

Liquidity planning and cash flow planning

Liquidity planning is essential for robust cash management. Typically, organizations develop both short- and medium-term liquidity plans. Finance teams often review cash flow weekly or monthly, and in times of crisis, they may engage in detailed 13-week liquidity planning. Long-term planning, extending beyond 12 months, is less common, particularly among startups and rapidly growing companies.

Cash flow planning encompasses the monitoring, analysis, and control of all cash inflows and outflows, ensuring that a company maintains adequate liquidity. Key challenges in this process include handling unexpected expenses, managing payment delays from customers, and adapting to seasonal revenue fluctuations.

Cash forecasting

Cash forecasting projects a company's future cash inflows and outflows, ensuring liquidity is maintained. While cash forecasting focuses on anticipated cash movements, liquidity planning leverages current data to make strategic decisions that extend beyond mere cash reserves.

Cash pooling

Cash pooling is a strategic method for centralizing and optimizing liquidity across a company’s subsidiaries. By consolidating funds into a central cash pool, companies can streamline resource distribution, smooth out liquidity fluctuations, and more effectively meet diverse financial needs.

While cash pooling is most commonly adopted by large corporations due to its complexity and resource demands, it is a viable option for any organization with multiple entities seeking to enhance financial management and efficiency.

Risk management

Effective risk management involves controlling various liquidity-related risks, including liquidity, credit, and market risks. Diversifying revenue and capital sources is a key strategy for mitigating these risks.

Monitoring account bank balances and transactions

A crucial aspect of cash management is vigilant monitoring of your bank account balances and transactions. Keeping a close eye on your company's cash flow ensures you are aware of your available liquid capital at all times.

Monitoring extends to transactions as well. By categorizing and analyzing payment flows, you can gain insights into where your money is going, what drives costs, what generates revenue, and identify opportunities for savings.

Tools & software to optimize cash management

Forget about struggling with Excel spreadsheets for tracking and managing your accounts. They fall short, particularly when handling multiple accounts and a growing volume of transactions.

Fortunately, there’s a range of advanced cash management software now available to streamline and enhance your company’s liquidity. No matter your needs or company size, you can find a solution tailored to fit. We compiled a handy spreadsheet for you to compare different cash management software.

Other ways to optimize your cash management include:

• Boost receivables: encourage timely payments from customers to improve cash flow.
• Streamline payment flows: adjust payment schedules and actively manage receivables and payables to optimize cash movement.
• Invest wisely: put surplus cash to work instead of letting it sit idle.
• Refine debt management: negotiate favorable terms for debt to reduce financing costs.
• Optimize working capital: reassess payment terms with suppliers and customers, and manage inventory more efficiently.
• Automate for efficiency: use real-time reporting to simplify account balance and transaction monitoring.

Cash management challenges

Managing cash flow in a complex corporate environment – where multiple business areas and subsidiaries, numerous bank accounts across various countries, and a multitude of payments in different currencies converge – can be daunting. The sheer volume and diversity of transactions create a landscape ripe for errors.

The challenge lies in obtaining a clear, real-time view of a company’s cash flow. Businesses need full transparency: they must always have an accurate picture of how much money is coming in, where it’s coming from, and where it’s going.

Conclusion: cash management

Cash management is the art of balancing your cash inflows and outflows with precision. Mastering this process ensures that your company not only maintains liquidity but also meets its financial commitments and seizes new investment opportunities.