What Is Cash Management?

In traditional Chinese thought, the concept of qi (a vital life force) is very popular. Nearly two and a half thousand years ago, the philosopher Zhuangzi wrote:

Human beings are born because of the accumulation of qi. When it accumulates there is life. When it dissipates there is death…

In business, cash flow is a lot like qi. And dissipating it with poor cash management can have a significant – or even fatal – impact on a company’s financial health.

Understanding what makes cash management important, and how to improve it, can help you revitalize your business.

What is cash management?

The term cash management refers to the process of optimizing the collection and management of cash flow channels. It is important for both individuals and companies.

The process of proper cash management also ensures there is enough available cash for a company or an individual to meet their financial obligations and achieve financial goals.

It involves a set of cash management strategies and practices with the sole aim of efficiently managing cash inflows and outflows.

Cash management vs treasury management

The key difference between cash management and treasury management is that the former focuses on short-term cash flow goals, whereas the latter focuses on maximizing long-term profitability.

The four A’s of cash management

The four A’s of cash management are a structured framework that revolves around four key steps in effectively managing cash.

They are designed to help an organization maintain its cash management responsibilities. This includes financial stability and the ability to make proactive financial decisions depending on its cash position.

Here’s a breakdown of each of the Four A’s:

1. Accounting

Solid accounting is the bedrock of cash management. It involves accurately tracking all cash inflows and outflows, maintaining clear records of financial transactions and ensuring that all financial information is up-to-date and accurate.

An important component of accounting is the cash flow statement. It summarizes the amount of incoming and outgoing cash and cash equivalents.

2. Analysis

Once financial data is properly accounted for, the next step is analysis. This enables a company to gain vital insights into cash flow management. These could include patterns, trends, and potential areas for improvement.

Analysis helps identify periods of positive cash flow or negative cash flow and allows for informed decision-making.

3. Allocation

Based on the analysis, cash allocation involves determining how funds will be distributed across various purposes. These can include areas such as operational expenses, debt payments, investments, and other financial goals.

Allocating cash effectively ensures that resources are used optimally and there is no idle cash within the business.

4. Adjustment

Cash management is an iterative process – business managers need to make adjustments as circumstances change. This includes adapting to shifts in cashflows, market conditions, and unexpected events.

Regularly reviewing and adjusting a cash management plan helps maintain its effectiveness.

Benefits of cash management

There are a number of key benefits to good cash management. They all contribute to the success of a business.

1. Liquidity management

This is the proactive process of ensuring that a business has enough cash on hand to meet short-term obligations. These include areas such as payroll, rent, and debt payments, as well as pay obligations such as accounts payable (A/P).

Liquidity management helps avoid potential financial crises and maintains cash balances. This ensures businesses can operate without interruption.

It is a critical component of financial performance and it directly impacts working capital – the money available to meet short-term obligations.

2. Optimized cash utilization

In the context of cash management, optimized cash utilization refers to the optimum strategic allocation and management of available cash resources.

For example, a company can invest surplus cash effectively, either in growth opportunities or a savings account. This ensures that money isn’t sitting idle in bank accounts and that excess cash is contributing to business growth.

Therefore, it allows businesses to invest surplus cash effectively, either in growth opportunities or in interest-bearing accounts.

The key is for business managers to find the right balance between maintaining sufficient liquidity and putting excess cash to work in a way that aligns with specific goals and risk tolerance.

3. Reduced borrowing costs

Reducing borrowing costs through effective cash management can lower interest expenses, improve financial health and preserve credit ratings.

It also provides businesses with increased flexibility, control, and profitability. This is because it frees up cash for investments, which avoids debt service burdens and minimizes financial risk.

Ultimately, by effectively managing cashflows, businesses can reduce their borrowing. This results in lower interest expenses, increased profitability, and an ability to negotiate better terms due to being in a stronger financial position.

4. Risk mitigation

Risk mitigation in cash management offers several essential benefits such as:

• Maintaining financial stability through uncertainty
• Ensuring liquidity for short-term obligations
• Reducing operational disruptions.

It also reduces borrowing costs, preserves credit ratings, and enhances investment decision-making by minimizing potential losses.

Effective cash management practices more broadly can help businesses foresee potential cash shortfalls and take preventative measures. This in turn further reduces the risks associated with market downturns, delayed receivables, or unforeseen expenditures.

5. Informed decision-making

Informed decision-making in cash management offers advantages that include optimized cash flow allocation, effective liquidity management, proactive risk mitigation, and strategic investment choices.

This leads to cost reductions by identifying inefficiencies and supporting business growth through key investment opportunities.

Regular cash flow analysis and forecasting provide critical financial insights. These in turn allow businesses to make informed strategic decisions on issues around:

• Expansions
• Acquisitions
• Capital expenditures

Ultimately, informed decisions ensure financial stability, adaptability, and long-term business success.

Example of cash management – predictable cash flow

A successful B2C marketplace wanted to build a B2B marketplace.

It is an online platform that connects shippers of large and bulky items (such as an 18-foot, 700-pound garden gnome!) and cross-country carriers. So, it knew its B2B purchasing journey had to exceed expectations.

However, its existing payment solution only accepted credit cards. This limited the B2B buyers it wanted to attract.

As part of their B2B marketplace payments strategy, they wanted to offer real-time net terms and B2B-specific BNPL. Plus, they needed to include dynamic pricing in the check-out flow, since this was a key part of their sales process.

They opted for a B2B marketplace payments solution. These included a seamless checkout experience, instant trade credit solutions, predictable cash flow, and the scalability to handle future growth.

What are cash management services?

Cash management services cover a range of financial offerings provided by banks, financial institutions, and specialized providers. These help businesses efficiently manage their cash flow and liquidity.

Some examples of cash management services include:

1. Automated Clearing House (ACH) Services: These services allow for electronic funds transfers, making direct deposits, bill payments, and business transactions efficient.
2. Fraud prevention solutions: Advanced tools and strategies are employed to protect against fraudulent activities and cybersecurity threats.
3. Liquidity forecasting: Using historical data and financial analysis to predict future cash flows, aiding in decision-making and planning.
4. International cash management: Managing cash flows across different countries and currencies, including foreign exchange services and cross-border payments.
5. Treasury management services: Comprehensive solutions for managing financial assets, liquidity, and risk, often used by larger corporations.
6. Consulting and advisory services: Providing expert guidance on cash management strategies, helping businesses optimize processes and make informed decisions.
7. Cashflow analysis: Analyzing cash flow patterns and trends to gain insights into cash movement and improve financial decision-making.

TreviPay’s cash management services

Use TreviPay to optimize cash management services. We automate accounts receivable and allow B2B enterprises and SMBs to offer flexible, branded credit lines to customers without tying up critical working capital.

You’ll receive payment from TreviPay in as little as 48 hours, which allows you to better manage cash flow and reduce your days sales outstanding (DSO).

For example, rather than accounts receivable (A/R) waiting to collect on invoices, you can choose your receivables financing settlement timing from 2, 7, 14, or 30 days, and dramatically increase cash flow while reducing accounts receivable turnover.

What’s more, TreviPay’s transaction fees are 30% less than credit cards.

Conclusion

Cash management is the optimization of cash flow. Effective cash management practices contribute to improved financial health, reduced borrowing costs, and increased opportunities for growth and investment.

The practice distinguishes itself from treasury management by focusing on short-term cash flow rather than long-term profitability.

The Four A’s framework—Accounting, Analysis, Allocation, and Adjustment—guides effective cash management. Benefits include liquidity management, optimized cash utilization, reduced borrowing costs, risk mitigation, and informed decision-making.

Cash management services provided by financial institutions range from electronic funds transfers to liquidity forecasting and fraud prevention.

Companies like TreviPay offer automated solutions to optimize cash flow and reduce accounts receivable turnover with lower transaction fees compared to credit cards.