Cash Management Defined (2024)

Imagine you find a $10 bill in your jacket pocket, buy a $9.50 sandwich and drop the twoquarters in your change jar. Congratulations — you’ve just practiced cashmanagement.In business, the process is understandably a bit more complicated. Cash management describeshow a business balances the cash coming in and the cash going out of the company to makesure there’s enough to meet its short-term debt obligations, invest in growth andmaintain financial stability. This article explains the finer points of cash management,ways to monitor cash flow it and how to avoid the pitfalls.

What Is Cash Management?

Cash management is how a business manages the inflow and outflow of cash to maintain a healthy cash flow while meetingshort-term debt obligations and reinvesting idle cash where it can be most beneficial— suchas in a high-yield account or by acquiring more assets to grow the business. Althoughdifferent businesses will have different needs — some may require more cash on hand,forexample — every business needs to master how it manages its own expenses, collectspaymentsfrom customers and maintains financial stability. Poor cash management is one of the topreasons why new businesses fail within five years of launch.

Key Takeaways

  • Cash management tracks and ensures a healthy flow of incoming and outgoing cash,incorporating the ability to invest for future business goals.
  • It’s possible for a business to be profitable and yet have a negative cash flow.
  • Effective cash management can improve a business’s ability to allocate its idlecash between keeping an appropriate amount on hand to pay its bills and making smarterinvestments.

Cash Management Explained

Cash management, also known as treasury management, has two main goals: to ensure that abusiness can pay its short-term financial obligations and to invest in business growth. Thecash management process oversees the company’s finances as represented by the inflowand outflow of cash over a given period. This information is valuable for financialforecasts. Businesses derive cash from three main sources: from operating activities,investing activities and financing activities.

Importance of Cash

If you’ve heard it once, you’ve heard it a thousand times: Cash is king —and forgood reason. It’s how a business pays for its daily expenses, such as paying itsvendor bills, buying materials and supplies, making payroll and covering overhead costs,without having to take on debt that eventually must be paid back in cash. Cash is alsonecessary to fund business growth, such as investing in new infrastructure or expanding to anew market; to cover unexpected expenses, like equipment repair; to weather unexpectedevents, such as a sales-reducing supply-chain issue or economic downturn; and, for seasonalbusinesses, to bridge the gap between one peak period to another.

Importance of Cash Management

Effective cash management can help a business stay solvent even during slow periods, meet itseveryday business needs, invest in ways to grow and maintain good credit for futurefinancing needs.

Even small changes can make a big difference in a business’s cash management processes.For example, a business might prefer to pay its bills as soon as they come in. But if Bill Acomes in on Monday and gets paid on Tuesday, even though it’s not due for 60 days, thebusiness might not have enough cash left to pay Bill B when it comes in on Wednesday and isdue in 15 days. Effective cash management would result in Bill A being scheduled for paymentcloser to the due date, freeing up cash for more urgent payments. However, even without BillB, the cash due for Bill A could be put to other uses, from simply accruing 60 days ofinterest income to buying new equipment, before the bill was due.

In other words, cash management isn’t just about having enough money to pay the bills.It’s about not leaving too much cash in low-yield accounts or petty cash boxes either.A well-managed cash flow allows for timely investments that help a business flourish or keepit afloat during economic downturns.

The Cash Flow Statement

The cash flow statementdocuments a company’s cash inflow and outflow from operating, investing and financingactivities over a specific period of time, such as monthly, quarterly or annually. One ofthree core financial statements—the other two are the income statement and thebalance sheet — the cash flow statementspeaks tothe company’s liquidity and overall financial health. It’s also a key tool forcash flow forecasting.

  • Operating activities: Operating cash flow is the amount of money thatchanges hands as a result of a business’s core operational activities over aperiod of time. The goal is to be cash-positive — that is, more money is flowingintothe business than out of it. Otherwise, the business may have no other choice but toborrow money to cover its liabilities.
  • Investing activities: These primarily comprise purchases and sales oflong-term assets (capital expenses), other businesses (mergers and acquisitions) andmarketable securities that focus on the business’s long-term health and growth. Anegative cash flow doesn’t necessarily mean a company is struggling; it may be theresult of a period of investment for expansion and actually signify a healthy company.
  • Financing activities: Cash flow from financing activities encompassesincoming cash from debt or equity and outgoing cash for dividends, debt payments andstock repurchasing. Keep in mind that a company could show net profits, but ifit’s primarily funding itself through debt, cash issues could arise, especially ifinterest rates rise and debt becomes more expensive.

Business Cash Flow Controls

The greater a business’s control over its cash flow, the healthier its cash flow islikely to be. On the accounts receivable (AR) side,the goal is to keep days sales outstanding(DSO) — the average number of days it takes to receive payments from customers— aslow as possible. To help achieve that, an AR process in which invoices are generated andsent out promptly and, optimally, automatically is critical. The ability to provide avariety of convenient digital payment options can also cut down DSO. Incentivizing customerswith discounts for early payments is another control option, as is proactively issuingreminder notes as payments near their due dates (another step ripe for automation). Inaddition, a control as basic as analyzing a customer’s creditworthiness beforeextending credit can help businesses protect themselves.

Accounts payable (AP) has a role in cash flow,too. Strategically prioritizing accounts and timing payments accordingly go a long waytoward ensuring that companies’ cash outflow doesn’t exceed inflow. This alsohelps them take advantage of early-payment discounts. Automating the AP process can lead tocost savings, as well.

Some important cash flow indicators for businesses looking to more effectively manage theircash are:

Working Capital

Working capital is theamount of cash (or cash equivalents) a company has above its short-term liabilities; it isused to meet short-term obligations. It’s calculated by subtracting currentliabilities, such as wages and accounts payable, from current assets, such as cash andaccounts receivable. Positive working capital means the company has enough liquidity to cover its liabilities and invest ingrowth opportunities. Negative working capital may signal the need to improve or bettercontrol cash management, such as by incentivizing customers to pay ahead of invoice terms orby selling inventory, especially older goods, at a lower price to achieve quick sales.

Another way to improve working capital is to delay paying certain vendor invoices but doingso judiciously, because late payments can accrue fees and damage customer relationships.Sage advice: Communicate with the owed parties before choosing this option. Taking out ashort-term working capital loan or business credit line can also help cover temporaryshortages in working capital.


Cash flow ratios are a type of financial metric that provides important insight into acompany’s performance, solvency, liquidity and overall viability. Working capital, forexample, can be expressed as a ratio, also called the current ratio. It measures liquidityand is calculated by dividing current assets by current liabilities. A ratio below 1 is ared flag that cash flow issues exist; a ratio above 2 bodes well for short-term liquiditybut may signify too much idle cash that could be used more effectively, such as by payingdown debt or investing in assets.

Operating cash flow ratio is another important measure, reflecting the number of times acompany can pay off its current debts with cash generated within the same period. Operatingcash flow ratio is calculated by dividing operating cash flow by current liabilities. Anumber greater than 1 indicates that the company has more cash in a period than it needs topay off current liabilities; the opposite holds true when the number is below 1. Certainbusinesses — for example, a grocery store with a quick turnaround between inventorystockingand payment — may be better equipped to manage a lower ratio.

Some other common ratios used to measure the health of a business’s cash managementare:

  • Cash flow margin, a profitability ratio that shows how efficiently acompany converts sales to cash. It’s calculated by dividing operating cash flow bysales.
  • Price to cash flow, a valuation ratio for public companies thatmeasures the amount of operating cash flow generated per share of stock. It’scalculated by dividing share price by operating cash flow per share.
  • Cash flow to net income, which measures a business’s ability togenerate cash from its operations. It’s calculated by dividing operating cash bynet income.

Reasons for Poor Cash Management

There’s no one-size-fits-all reason for poor cash management, as every business’scash flow is unique. The manual, error-prone recording of cash inflow and outflow is onecommon problem. Just one mistake, like a pair of transposed numbers, can lead a business tobelieve it has more or less cash than it actually does. Error resolution and the sheer timeit takes to gather needed data also affects a business’s ability to issue timely cashflow forecasts and reports. This is why many modern businesses have turned to automatedsoftware for cash management.

Some other reasons businesses may struggle with poor cash management include:

They don’t understand the cash flow cycle.

A business with a negative cash flow can continue to operate for only so long, which explainswhy understanding how the cash flow cycle works and how to manage it accordingly is crucial.The business may achieve record-breaking sales, but if it’s unable to collect paymentsin a timely manner (or at all), it can easily run out of cash. DSO is one way to monitor howlong, on average, it takes a company to receive cash payments from customers.

On the cash outflow side of the equation, a business will theoretically have more cash onhand to invest in growth when it pays its own bills closer to their due dates. However,it’s rarely that cut-and-dried, especially as a business grows and transacts on adaily basis. It can also save more in the long run by taking advantage of early-paymentdiscounts. That said, a practical approach would be for the business to create a paymentschedule that spreads out when its expenses are paid, thereby putting less strain on itscoffers all at once. Payment method is another consideration. If paying by check, forexample, the business won’t know exactly when the check is received, deposited orcleared. That means the dollar amount won’t leave the business’s account fordays or even weeks after the check was written — time during which the business couldhaveput the money to better use.

They have a poor understanding of profit versus cash.

Just because a company records a profit doesn’t mean its cash flow is in good shape.Cash is money that enters and exits a business from operating, investing and financingactivities over a given time period. When more money is coming in than going out, thecompany has a positive cash flow and is able to meet its daily expenses. The opposite holdstrue with a negative cash flow. The company’s cash position is recorded on its cashflow statement. Profit is how much revenue remains after the company deducts its operatingexpenses. Based on the accrual method ofaccounting, profit recognizes revenue when it’s earned and expenses whenthey’re incurred during a specific time period. This information is accounted for inthe company’s income, or profit and loss, statement.

The timing differences between when cash and profit are factored in can be a big swing. Forexample, a company that sells a high percentage of goods on credit will show a positiveprofit, which reflects sales when they are made — but until customers pay theirinvoices,the business could simultaneously have a negative cash flow.

They lack cash management skills.

Businesses that lack cash management skills could be in for some hard lessons. By studyingtheir cash flows, they can more accurately forecast their cash needs for the future andprevent overextending their resources, launching too many products or opening new locations.If they sell on credit, restocking inventory that has yet to be paid for can put a strain oncash flow that can be challenging to overcome. Effective cash management improves operationsfor both incoming and outgoing cash by properly tracking and balancing accounts payables andreceivable.

Another cash management skill is based on trusted business relationships that can lead tomore favorable or extended payment terms. For example, a supplier or financial institutionmay be more willing to extend a business’s payment deadline or alter financing termsif the latter has a solid track record. Offering to make an early payment to a longtimebusiness associate is another way to forge strong ties.

They made bad capital investments.

Long-term growth is often the goal behind investment in capital assets, like physicalproperty or equipment. But for myriad reasons, investments don’t always work out asplanned. A bad capital investment not only fails to pay for itself but, if financed, willcontinue to cost a company money until the loan is satisfied. Of course, not all has to belost. For example, a business could lease or sell property and resell extra equipment it hadintended to use to generate cash.

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Cash Management Defined (1)

Automate Cash Management With NetSuite Cash 360

NetSuite Cash 360 is adashboard-driven tool that helps businesses monitor and manage their cash position andliquidity with real-time visibility into how much money is flowing into and out of thecompany at any given moment. It also leads to better-informed cash flow forecasts andprocess improvements, including automating previously manual tasks. A part of NetSuiteERP, Cash 360 leverages transactional and historical data to better predict upcomingcash flows and help ensure there is adequate cash on hand to meet financial objectives.

Cash management is a necessity for business stability and growth. Without proper cashmanagement, a business is taking its chances that it will have the liquid funds to pay itsexpenses, restock inventory and meet payroll. But there’s more to good cash managementthan just scraping by: Without sufficient working capital — a key cash flow indicator— itwill be tough for the business to invest in new projects, assets and continued growth.Proper cash management can be more easily achieved by automating operations to speed cashflow in both directions.

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Cash Management FAQs

What’s the difference between cash management and treasury management?

Cash management and treasury management are often used interchangeably. However, somefinancial professionals use “treasury management” to describe a higher corporatelevel of abusiness, including more information on funding, deficit spending and investments. Cashmanagement, on the other hand, looks at the cash coming in and out of a business, typicallyover a shorter period.

What is an example of cash management?

Anytime a business chooses when and where to spend money, it is practicing cash management.Say, for example, a business has a large vendor bill coming up but also needs to invest insome new factory equipment before a busy season. It decides to reach out to the vendor andarranges for an extended payment plan so it will have more cash on hand in the short term.At the same time, the company’s accounts receivable team offers a few customers anearly-payment discount with the goal of getting them to pay more quickly. These are two waysthe company is managing its cash flow.

What are the types of cash management?

Businesses receive and spend cash in many ways, so cash management can take many forms.Common types of cash transactions that need managing include operating cash flows, interestgeneration, tax bills/refunds, loan payments, asset acquisition/sales, payroll andutilities.

What are cash management activities?

Common activities to improve cash management include speeding up accounts receivable andspreading out accounts payable through technology and automation. Other tactics includemeasuring ROI on capital investments, keeping enough cash on hand to cover short-termliabilities and reinvesting surplus cash into high-yield accounts or investments.

What are the basic principles of cash management?

The basic principles of cash management include a comprehensive understanding of cash flow,choosing assets and investments wisely and tracking their returns. Efficient accountsreceivable and accounts payable processes are also important.

As a financial expert with extensive knowledge in cash management, I can provide insights into the concepts discussed in the article. My expertise is based on a deep understanding of financial principles and practical experience in advising businesses on effective cash management strategies.

The article discusses the concept of cash management and its crucial role in maintaining a healthy financial position for businesses. Here are the key concepts covered in the article:

  1. Cash Management Overview:

    • Cash management is the process of balancing the inflow and outflow of cash in a business.
    • It ensures that a business can meet short-term debt obligations, invest in growth, and maintain financial stability.
  2. Importance of Cash:

    • Cash is essential for daily business operations, such as paying bills, buying materials, making payroll, and covering overhead costs.
    • Effective cash management allows businesses to fund growth, handle unexpected expenses, and bridge gaps in seasonal businesses.
  3. Cash Flow Statement:

    • The cash flow statement documents cash inflow and outflow from operating, investing, and financing activities over a specific period.
    • It is a key tool for assessing a company's liquidity and overall financial health.
  4. Business Cash Flow Controls:

    • Accounts receivable (AR) and accounts payable (AP) play crucial roles in cash flow management.
    • Control measures include optimizing the AR process, providing digital payment options, and strategically prioritizing AP.
  5. Working Capital and Ratios:

    • Working capital is the amount of cash a company has above its short-term liabilities.
    • Ratios like the current ratio and operating cash flow ratio provide insights into a company's liquidity and performance.
  6. Reasons for Poor Cash Management:

    • Lack of understanding of the cash flow cycle.
    • Poor differentiation between profit and cash.
    • Insufficient cash management skills.
    • Bad capital investments.
  7. Automating Cash Management:

    • NetSuite Cash 360 is a dashboard-driven tool that helps businesses monitor and manage their cash position in real-time.
    • Automation leads to better-informed cash flow forecasts and process improvements.
  8. Cash Management FAQs:

    • Difference between cash management and treasury management.
    • Examples of cash management activities.
    • Types of cash management.
    • Basic principles of cash management.

In conclusion, effective cash management is crucial for business stability and growth. Businesses need to understand the intricacies of cash flow, employ sound financial controls, and leverage automation tools to optimize their cash management processes.

Cash Management Defined (2024)


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