We find many a time, companies struggle to meet their day to day operating expenses, not because they failed to generate adequate money out of their business but they were not able to manage their cash. Cash management speaks of a wide-ranging area of finance involving the collection, handling, and usage of cash. It also involves an assessment of market liquidity, cash flow, and investments. Thus, the ‘Cash management’ is a crucial component of a company’s financial stability and solvency.
Principles of cash management:
A company can improve its cash position by following five basic principles of cash management:
- When the debtors pay their liability fast the company can use those funds quickly for operating cycle. So it is essential to speed up the collection process of receivables. Some companies offer discount for early payments as they cannot afford to antagonize their customers by forcing them to pay timely.
- The economic order quantity (EOQ) is the order quantity that minimizes total holding and ordering costs for the year. So it is essential to keep the inventory as low as possible to generate more cash at its disposal.
- Delay the payment to creditors (However, finance manager must ensure that such delay should not damage the reputation and rating of the company) to generate more cash at its disposal.
- The company should not use the short term source of funds to long term usage. If the company use money meant for working capital towards purchase of machinery, land building etc. which will naturally put the company in a precarious cash crunch because no money will be left for operating cycle.
- Invest idle cash in risk free liquid investments even if it is for overnight to make some profit out of it.
