Word of the Week 'Cash Management'


Cash Management

REVIEWED BY WILL KENTON

What is Cash Management

Cash management is the corporate process of collecting and managing cash, as well as using it for short-term investing. It is a key component of a company's financial stability and solvency. Corporate treasurers or business managers are frequently responsible for overall cash management and related responsibilities to remain solvent.

BREAKING DOWN Cash Management

Cash management involves not only avoiding insolvency, but also reducing the average length account receivables (AR) are outstanding, increasing collection rates, selecting appropriate short-term investment vehicles, and increasing cash on hand to improve a company's cash position and profitability.

Successfully managing cash is an essential skill for small businesses, because they typically have less access to affordable credit and have a significant amount of upfront costs to manage while waiting for receivables. Wisely managing cash enables a company to meet unexpected expenses, and to handle regularly occurring events such as payroll.

Receivables Cash Management

Cash management is the treasury function of a business, responsible for achieving optimal efficiency in two key areas: receivables, which is cash coming in, and payables, which is cash going out.

When a business issues an invoice it is reported as a receivable, which is cash earned, but not yet to be received. Depending on the terms of the invoice, the business may have to wait 30, 60 or 90 days for the cash to be received. It is common for a business to report increasing sales, yet still run into a cash crunch because of slow or poorly managed receivables. There are a number of things a business can do to accelerate its receivables and reduce payment float, including clarifying billing terms with customers, using an automated billing service to bill customers immediately, using electronic payment processing through a bank to collect payments, and staying on top of collections with a receivables aging report.