Cash Management Basics

There’s a saying that goes “Cash is King”. Many successful business owners or financially secured entities knows that cash dictates the past, present and future of a business.

In my experience, it will be hard to manage and succeed in business if you cannot manage your cash.

Cash is king because it dictates the financial health and direction of a company. For an instance, When cash is abundant, it’s much easier to create and make business decision compared to when cash is limited or scarce. It is much easier to run a business when cash is not a problem. When cash becomes a problem, oftentimes business finds it hard to sustain and grow, if not resolve, eventually it closes down. Lack of cash also contributes to the stress of the owners or managers of a business.

In this article, I’ll be sharing with you basic information about cash management, and how you can use the said information in your business to avoid the trap of becoming financially troubled.

What is cash management?

Cash management is the ability to maximize an entities cash balance for reasons such as: a) additional income, in case of surplus; b) maintenance of just enough cash for the needed periodic disbursements related to operation, liabilities and emergency; c) declaration of dividend or profit sharing; d) and many more.

In simple term, cash management is ensuring you have enough cash to pay what’s needed to be paid, but not holding too much cash that you miss the earning opportunity if cash has been invested.

When to manage cash?

Small business owners normally do not give much value to cash management because they think they don’t need it. They have this belief that cash management is only applicable to big companies. However, despite size and age of a business, cash management is advisable even to small or startup.

If you do it properly, cash management can be helpful in ensuring stability in the operation, and opportunity for growth and expansion of your business.

Below are some of the important reasons why you need manage your cash:

Reasons why you need to manage your cash

One of the important steps in achieving business stability and growth is to properly manage cash.
Good cash management brings opportunity for growth and investment while poor cash management can lead to many financial stress such as lack of funds for operation, inability to pay off debts and bankruptcy.

Here are some of the reasons why you need to manage your cash:

  1. To  anticipate the cash needed for the daily business operation
  2. To reserve enough cash to pay off current and noncurrent loan amortizations
  3. To anticipate and be prepared to handle possible contingency or emergency
  4. To be able to invest for growth or expansion in case there’s cash surplus

There are many other reasons why you need to manage your cash. But above mentioned are the basics.

How to manage your cash?

To manage is to monitor its movement. It is often referred to as cash flow.

Cash flow consists of two (2) movements: cash inflow and cash outflow.

  • Cash inflow is the amount of cash coming in. In accounting we call it cash receipt. Sources of cash that’s coming in can be capital contribution, loans, cash sales, collection of receivable, return on investment such as dividend, interest, etc
  • Cash outflow is the amount of cash coming out. In accounting we call it cash disbursement. Sources can be withdrawals, capital expenditures, payment of loans, interest, purchase and expenses, etc

To be able to monitor cash flow movement, it’s important to have a proper and reliable record-keeping system or bookkeeping in place.

Bookkeeping is the process of recording the daily business transactions. It’s important to keep note of this business transactions in order to know how it impacts your cash.

Aside from reliable bookkeeping process, you also need a periodic monthly financial reporting, especially the cash flow statement, in order to know how cash was used in the business

In monitoring cash flow using the cash flow statement, it’s important to take note of three (3) activities:

  1. Operating activity: It pertains to the movement and management of cash for the day to day business transactions. It comprises of movement in current assets and liabilities.
  2. Financing activity: It pertains to the ability of the company to leverage and raise needed capital or cash to finance the business. Financing is usually needed if the business operating activity is not able to generate enough cash to sustain its operation or its plan for expansion. It comprises movement of non-current liabilities and equities.
  3. Investing activity: It pertains to the company’s long term plans for growth. Investing usually includes purchases of non-current assets such as additional machines, equipment, vehicles, improvements of building, etc.

Where to put your cash?

If the cash is intended for operation or day to day business activity, its best to place cash on hand or in bank. This is so you can easily get cash when needed. Any cash surplus may be invested in long term investments or assets.

However, keep it mind that you should only use excess cash to long-term investments because investing it for long-term will limit your ability to get cash readily.  The benefit of this limitation is that normally it compensates with returns such as interest income or increments.

I hope this article has been helpful for you to understand importance of cash management and learned the basics on how to manage it.


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Disclaimer: The content of this article may become outdated because of changes in the rules and regulations over time. It does not substitute the need for inquiring professional advice.