how cash management works
cash is among the primary assets that individuals and companies use to pay their obligations and invest managing cash is what entities do on a day to day basis to take care of the inflows and outflows of their money proper cash management can improve an entity s financial situation and liquidity problems for individuals maintaining cash balances while also earning a return on idle cash is usually a top concern in business companies have cash inflows and outflows that must be prudently managed in order to corporate cash management involves the use of business managers corporate treasurers and chief financial officers cfos these professionals are mainly responsible to implement and oversee cash management strategies and stability analysis many companies may outsource part or all of their cash management responsibilities to different service providers regardless there are several key metrics that are monitored and analyzed by cash management executives on a daily monthly quarterly and annual basis cash management may also be known in some parts of the financial industry as treasury management the importance of the cash flow statement in cash managementthe cash flow statement is a central component of corporate cash flow management while it is often transparently reported to stakeholders on a quarterly basis parts of it are usually maintained and tracked internally on a daily basis the cash flow statement comprehensively records all of a business s cash flows it includes the bottom line of the cash flow statement reports how much cash a company has readily available the cash flow statement is broken down into three parts operating investing and financing the operating portion of cash activities tends to vary based heavily on the net working capital which is reported on the cash flow statement as a company s current assets minus current liabilities the other two sections of the cash flow statement are somewhat more straightforward with cash inflows and outflows pertaining to investing and financing managing cash through internal controlsthere are many internal controls used to manage and ensure efficient business cash flows internal controls are various accounting and auditing mechanisms that companies can use to ensure that their financial reporting is compliant with regulations these tools resources and procedures improve operational efficiency and prevent fraud some of a company s top cash flow considerations include the cash management of working capitalcash flows pertaining to operating activities are generally heavily focused on working capital which is impacted by ar and ap changes investing and financing cash flows are usually extraordinary cash events that involve special procedures for funds a company s working capital is the result of its current assets minus current liabilities working capital balances are important in cash flow management because they show the number of current assets a company has to cover its current liabilities working capital generally includes the following companies strive to have current asset balances that exceed current liability balances if current liabilities exceed current assets a company would likely need to access its reserve lines for its payables companies usually report the change in working capital from one reporting period to the next within the operating section of the cash flow statement if a company has a positive net change in working capital it increases its current assets to cover its current liabilities thereby increasing the total cash on the bottom line a negative change means a company increases its current liabilities which reduces its ability to pay them efficiently and its total cash on the bottom line there are several things a company can do to improve both receivables and payables efficiency ultimately leading to higher working capital and better operating cash flow companies that operate with invoice billing can reduce the days payable or offer discounts for quick payments they may also choose to use technologies that facilitate faster and easier payments such as automated billing and electronic payments advanced technology for payables management can also be helpful companies may choose to make automated bill payments or use direct payroll deposits to help improve payables cost efficiency cash management and solvency ratioscompanies can also regularly monitor and analyze liquidity and solvency ratios within cash management external stakeholders find these ratios important for a variety of analysis purposes as well the two main liquidity ratios analyzed in conjunction with cash management include the quick ratio and the current ratio the quick ratio is calculated from the following the current ratio is a little more comprehensive it is calculated from the following solvency ratios look at a company s ability to meet all its obligations in the long term some of the most popular solvency ratios include debt to equity debt to assets cash flow to debt and the interest coverage ratio 