Why is Cash Management Essential for Businesses

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Why is Cash Management Essential for Businesses

Sarah Dawson, CFO Tech Outlook | Thursday, April 29, 2021

Cash management is vital for corporations as they need to monitor their systems time and avoid bankruptcy.

FREMONT, CA: Cash management suggests the optimum utilization of cash to ensure maximum liquidity and maximum profitability. It refers to the apt collection, disbursement, and investment of cash in the business. For a small business, accurate utilization of cash ensures solvency. Hence, cash management is a critical business function; it is a function that handles the collection and utilization of cash. Learn more here.

For small businesses, it can result in a point of no return. It impacts the credibility of the business and can lead to them shutting down. Hence, the most critical task for business managers is to handle cash. Management requires ensuring that there is adequate cash to meet the present obligations while ensuring no idle funds. This is essential as businesses rely on the recovery of receivables. If a debt turns bad, it can jeopardize the cash flow. Therefore, cash management is being cautious and making enough provision for contingencies such as bad debts, economic slowdown, and many more.

In an ideal instance, an organization can match its cash inflows to its cash outflows. Cash inflows significantly include account receivables, and cash outflows majorly comprise account payables. Practically, while cash outflows like operational expenses and payment to regulators are more or less certain, cash inflows can be complex. Timely payments ensure reduced costs to the organization. Receivables management also comprises a robust mechanism for follow-ups. This will ensure rapid recovery, and it will also help the business predict bad debts and unforeseen situations.

While receivables management is one of the core areas in the cash management function, payables management is also essential. Payables arise when the firm has made purchases on credit and require making payments for the same within a fixed time. A firm can take short-term credit from financial institutions. However, these credit facilities come at a cost, and therefore, an enterprise must ensure that they manage a good liquidity position; this will assist in timely repayments of debts.

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