Cash Management Techniques
Financial Management Assignment
By Sakshi Srivastava
MBA Sem 2( Sec C)
Roll no. 2210019025013
Introduction
Cash management techniques are a set of strategies and practices used by
businesses to effectively manage their cash flow. These techniques involve
managing cash inflows and outflows, budgeting, forecasting, and monitoring
liquidity.
The goal of cash management techniques is to ensure that a business has
enough cash to meet its short-term and long-term obligations. This is
especially important for businesses that operate on a tight budget or have
limited access to capital.
Cash management techniques help businesses to better understand their
financial position and make informed decisions about how to allocate their
resources.
Additionally, cash management techniques can help businesses to identify and
address any potential cash flow issues before they become a problem. By using
cash management techniques, businesses can increase their profitability and
reduce their risk of financial distress
What is Cash Management?
Cash Management refers to the collection, handling, control and
investment of the organizational cash and cash equivalents, to ensure
optimum utilization of the firm’s liquid resources.
Cash is both a fundamental resource and the means by which the
entity acquires other resources. To manage cash is to manage the
entity’s ability to purchase assets, service debt, pay employees, and
control operations. Thus, effective cash management directly
correlates with the entity’s ability to realize its mission, goals, and
objectives
Objectives of Cash Management
After getting familiar with the motives behind holding the cash balance, we
should know the objectives that govern the process of cash management. The
cash management is done with two basic objectives:
To meet the payment schedule
To minimize Funds as cash balance.
Cash Management Techniques
Collect Quickly: Ensure timely payment collection from customers to
maintain a steady and reliable cash flow. Send invoices promptly and
maintain regular contact with customers to increase the likelihood of
receiving payments on time.
Monitoring Costs and Inventory: Keep a close watch on supplier costs and
explore opportunities to negotiate better deals or payment options. Also,
closely monitor your inventory to identify which products are selling well and
adjust your stock levels to avoid tying up excessive working capital.
Concentration Banking: This involves centralizing accounts receivable
collection for businesses with multiple branches. Customers make payments
to a regional collection center, which then transfers the funds to the main
bank. This system saves time and improves cash management by consolidating
funds.
.
Lockbox System: Set up post office lock boxes at key collection centers to speed
up the processing of customer payments. Payments are mailed to a specific P.O.
Box that is directly accessible by the bank, eliminating the need to physically go
to the bank to make deposits.
Float: Float refers to the time gap between when a payment is made and when
it is cleared or available for use. The net float can affect the cash balance shown
in a company's ledger compared to the available balance in its bank account.
Understanding float helps businesses manage their cash flow effectively.
Electronic Data Interchange (EDI): EDI enables the direct electronic exchange of
information between parties, including financial transactions. Financial EDI
eliminates the need for paper invoices and checks, reducing time delays and
eliminating float. Sellers can send electronic bills to buyers, who can authorize
their banks to make payments electronically, resulting in faster and more
efficient transactions.
