View: Types of Cash Management System

The important objective of cash management of an entity is that it has enough money available to pay for what it needs in the present and near future. It’s the actual inflow and outflow of cash, highlighting the business entity’s ability to meet obligations at any given time.

The cash management system has several types of critical parts like cash flow forecasting, liquidity management, Risk Management, cash Positioning, Receivable management, etc.

Cash flow forecasting:

A cash flow forecast outlines the expected income and expenses of the business entity over a period. It’s a financial roadmap, setting financial goals and limits for the business. Cash forecasting is a tool used by banks and corporates to identify future cash needs and look at ways to deliver more value to customers while improving profit margins, along with economic uncertainty, and more and more competitive market conditions.

Liquidity management:

 Liquidity management focuses on ensuring that there is always enough liquid cash available to meet immediate and short-term obligations. Surplus funds should be prudently used so that money is available for working capital,  equipment purchase, and loan repayments without any hurdles.

Risk Management:

Cash management involves various risks, such as currency fluctuations, fraud, operational errors, and regulatory compliance. It is essential to identify and prioritize cash management risks and develop risk mitigation strategies. CMS process assess internal controls, identifies external risks, categorizes and prioritizes risks, develops risk mitigation strategies, and monitors and reviews the risk management process regularly.

Cash positioning:

Cash positioning is the practice of strategically managing and investing an organization’s cash resources that helps evaluate its cash position and liquidity and project cash needs. An organization may have different sources of cash inflow and multiple bank accounts used to manage it. Cash positioning ensures that the establishment can meet its financial obligations promptly, and can also help it seize opportunities, manage risk, and improve creditworthiness.

Payables and receivables management:

For a business enterprise managing accounts payable (AP) and accounts receivable (AR) are critical to keep the business running smoothly. Usually, the management tries to negotiate longer payment terms with the company’s suppliers and shorter payment terms for products and services consumers of the company. The longer payment terms with creditors and shorter payments with debtors will give the company more flexibility in managing cash flow. Timely raising of invoices and follow-up on due dates helps the company to receive payment in time and the company can meet its financial obligations promptly. Timely payment to the creditors improves the creditworthiness of the business enterprises.

Treasury Management:

Treasury management is strategizing the best use of short-term funds available to an organization. Treasury management in banking is a broad term that describes a range of services that banks offer to help businesses manage their cash flow and move cash. These services can help corporate save money, improve processes, and protect themselves from fraud. Banks develop trading strategies based on their interest rate scenarios and views on the yield curve and invest excess cash in short-term investments, including treasury bills.

Cash Management System encourages fair and less risky financial management practices. This helps in making more informed investment decisions.

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