Efficient cash management can help any organization balance its cash flow to maximize value and effectively secure its solvency. Managing the inflow and outflow of cash is a vital financial function that can create a competitive advantage or, if poorly executed, unwarranted operating expenses.
A profitable cash management program is designed to control the allocation of funds to attain maximum value for the organization’s short- and long-term business strategy. Regulating your company’s cash flow timeline the time cycle of purchasing and paying for resources and then correspondingly selling and collecting payment for your company’s products or services requires informed judgment and precise calculation. Time is money, and impediments to your cash flow can produce negative consequences.
Ample cash must be readily accessible for daily operations; simultaneously, surplus reserves should be invested for maximum return. Achieving equilibrium between these conflicting counterparts is cash management’s primary function.
Successful cash management systems accomplish this by ensuring the inflow of funds is directed to a central point and is unhindered. They also control the outflow of funds and communicate key information necessary to regulate events accurately and timely.
All cash flow cycles have a cash gap the time between your investment and your return, measured in days. This gap is the cost of doing business. Interest accrues each day your investment is borrowed. Thus, the longer your cash gap, the higher the cost of your investment and the lower your return.
A cash management system can help you eliminate unnecessary procrastination that can waste your organization’s valuable resources.
A competent system offers the tools necessary to successfully control and manage your cash gap. Characteristically, these tools include bank provider services and internal collection and disbursement policies that can help regulate and manage your cash flow timeline. More often than not, the shorter your cash flow cycle is, the more liquid and profitable your company is. And the more profitable it is, the more value it provides to your stakeholders.
Naturally, the value of these tools is offset by their cost and return is highest when complemented by low cost. In addition, the system must be supported to achieve maximum benefit.
Personnel must follow the system’s policies and guidelines. Bank accounts should be constructed to sustain receptive and efficient processes. Forecast statistics and credit resources should be qualified to ensure sufficient funds are readily and constantly available. These prerequisites are essential to the success of any cash management program.
To improve your organization’s cash management process, you must understand how you do business and how others do business with you. This essential business-process evaluation can uncover cash flow improvements that will support your strategic goals.
For example, a company utilizing ACH transfers (Automated Clearing House, a collection of electronic interbank networks used to process transactions) as a payment option could achieve benefits. ACH transfers eliminate the typical float period caused by traditional payment options; the exact date of payment is defined.
As a result, the payee has more control over when its payment is deducted from its bank account, and the payor knows precisely when the payment will be received. The end result provides information to manage your business’s cash forecasting and cash flow with greater accuracy and align your organization’s strategic goals with the needs of your customers and suppliers. With these enhanced cash management skills, you will also be providing better customer service while matching the needs of your cash management system and making modifications that are beneficial to both you and your customers.
The advantages of a strong cash management program reach well beyond mere cost savings. They can also enhance your organization’s ability to regulate many other internal processes such as banking fees and services, relationships with financial partners and fraud prevention, to name a few.
Many of these benefits can add to your bottom line. But their intangible benefits can be equally valuable to your organization and its stakeholders.
Reach Anita Knudtson, CPA, CTP, at (574) 239.7877 or firstname.lastname@example.org.