Cash Management for Businesses
Successfully running a business requires a lot of know-how and resources, from strategically managing cash on-hand to understanding the ins and outs of commercial lending and deposits. This all generally falls under the topical umbrella of treasury management—which also includes cash management.
In this article, we’ll provide a crash course in a few key cash management topics—including the importance of cash management in business and how financial institutions like Indiana Members Credit Union (IMCU) can help your business to effectively manage its cash flow.
What Is Cash Management?
Cash management focuses on executing an organization’s short-term goals—and ensuring that there is enough cash on hand to comfortably meet its current and near-future obligations. Cash management is technically a subset of treasury management, though these terms are sometimes used interchangeably. The broader focus of treasury management, then, also includes things that can impact the company’s long-term financial security, like developing sound funding and investment strategies.
As you can imagine, the objectives of cash management and treasury management functions go hand-in-hand, with plenty of shared objectives, like:
- Monitoring and optimizing business liquidity
- Financial planning and forecasting
- Mitigating various forms of financial risk
Credit unions like IMCU offer a selection of cash management services that can help your small business achieve the above objectives, and more. From ACH origination to wire transfer services, you can get the support you need with solutions tailored to your needs.
Why Is Cash Management So Important?
The importance of cash management is difficult to overstate, as it’s often considered one of the keys—if not the key—to a successful business. Effective cash management enables businesses to improve their decision-making, as well as their ability to understand and optimize their current and future financial standing.
Would it surprise you to learn that poor or ineffective cash management is to blame for over 80% of business failures? That’s precisely what one study found, meaning cash management accounts for far more business failures than all other factors combined.
Contrary to what some might think, cash management isn’t simply about saving money. Rather, it’s about finding the right balance between cash on-hand and longer-term funding and investment. As Investopedia puts it, businesses “need to generate healthy cash flow to survive, but not hold too much so that inventory suffers or investment opportunities are missed.”
What Are the 4 Aspects of Cash Management?
Looking more closely at the concept of cash management and what it is set to look like in the post-pandemic “new normal,” McKinsey & Company outlines four key functions to get right:
- Working capital, including the management of accounts receivable, accounts payable, and inventory.
- Capital expenditures, including the allocation of capital and how projects are carried out.
- Operating expenditures, including expenses related to employees as well as non-employees (and/or procurement).
- Balance sheet, including balance-sheet restructuring, as well as capital structure and external funding.
What Is the Cash Management Process in Business?
No two cash management processes are going to be exactly the same, since each company has its own objectives and priorities. It’s also not a linear process, since cash management involves monitoring the company’s finances, considering its current initiatives and challenges, and developing timely strategies for optimizing cash flow.
When cash is effectively managed, a business is better positioned to meet its payment obligations, account for future payments, and ensure that business operations are stable (and sufficiently liquid).
As far as the specific activities that these processes should include, Investopedia cites the following cash management examples:
- Generating cash flow statements. These comprehensive, structured documents serve as a record of all cash coming into—and going out of—the business, helping the organization to monitor their current cash on hand.
- Implementing internal controls for managing cash. Internal controls, or “various accounting and auditing mechanisms that companies can use to ensure that their financial reporting is compliant with regulation,” are key to preventing fraud and improving the efficiency of operations.
- Managing working capital. Quantifying and managing the difference between the company’s current assets and liabilities helps a company to optimize their working capital and inform decision-making.
- Evaluating solvency ratios. Solvency ratios offer a framework for monitoring and analyzing a business’s liquidity. In layman’s terms, a good solvency ratio means the company has enough cash flow available to cover its expenses. The “current ratio” is a straightforward example with a simple formula: simply divide current assets (e.g., cash and cash equivalents, accounts receivable, and other liquid assets) by current liabilities (i.e., short-term financial obligations soon to come due).
What Are Effective Cash Management Strategies?
Effective cash management strategies are those that enable a business to make smart decisions, especially to help the organization optimize their cash flow and/or free up working capital.
While the specifics of each business’s objectives and cash management processes may vary, there are certain universal strategies. For example, Deloitte recently identified four best practices that can enhance your own cash management strategy, which are:
- Shortening the cash conversion cycle through the use of technology.
- Optimizing financial functions such as accounts receivable and accounts payable.
- Actively tracking cash flow and improving forecasting practices.
- Efficiently matching funding sources to short- and long-term financial expenses and obligations.
Many organizations opt to work with a financial institution like a bank or credit union to leverage professional cash management services. In doing so, they gain access to insights and advocacy that can help them succeed. IMCU offers a range of cash management services for businesses including ACH Origination, Wire Transfer, Positive Pay, and Business Bill Pay. Using these services can help ensure that cash is managed efficiently and effectively, empowering business leaders to dream big and feel supported.
IMCU: A Member-Centered Cash Management Partner for Small Businesses
At IMCU, we provide several types of cash management services that can help a small business optimize their working capital and ensure a successful and sustainable future. Our online banking platform provides enhanced functionality for businesses looking for services like:
- ACH Origination: Initiate transfers, process payroll via direct deposit, set up transaction-based notifications, and more.
- Wire Transfer: Initiate outgoing wires, review and approve staff authorization, and process transfers through a secure online platform with enhanced security.
- Positive Pay: Leverage automated fraud detection, and simplify or automate reconciliation processes.
- Business Bill Pay: Process payables and payroll, customize permissions, configure one-time and recurring payments, and more.