Thus, you can develop strategies that help in managing cash effectively. But efficient cash management requires cash planning, cash flow management, cash control and maintenance of adequate cash balance. Therefore, you need to develop strategies on the basis of such cash management functions.
What is cash management strategy?
Strategy is a detailed plan of actions you need to take in order to achieve your goals. Cash management strategy is working out a plan to manage cash in such a manner that it can be used efficiently and effectively.
The cash management strategy is based on a number of principles that are used by organizations to devise strategies. The strategies used by management are:
How is a great cash management strategy formulated?
There are certain principles that are considered in the formulation of a great cash management strategy. Understanding these principles can help you to develop a good strategy for your own cash management.
Part 1: High level strategy
The first part of the strategy is the high level strategy. It is a statement of intent and therefore should be drafted very carefully. The high level strategy should encompass the overall purpose of cash management. It should also specify the philosophy that underlines cash management. The statement of intent should also indicate the organizational goal and objective to be achieved. It should also provide details of the risk faced by the organization.
Part 2: Purpose of cash management
In this part, the purpose of funds management should be specified. Here the role of cash in generating cash inflows and preventing cash outflows should be specified. The goal should be to enhance the organization’s profitability. The objective is to ensure that any unexpected income is collected and any unexpected expenditure is only met from existing cash.
Part 3: Roles and responsibilities in cash management
It should be clearly specified who will have the responsibility for cash management. These should include the management, others in the organization and third parties who are involved in the cash management process.
Part 4: Statement of the constraints
The constraints on cash management should be specified in this part. The constraints can be related to legal requirements, the availability of cash, the timing of cash collection, the timing of payouts, the cash flow, and market factors. Any constraints that are considered should be stated clearly so as to provide a clear indication of cash management.
Part 5: anticipated cash flows
In this part, cash inflows and cash outflows should be identified. This could include rent, expenditure on establishment costs, and expenditure on marketing. The anticipated cash flows from sources of cash inflows such as trade creditors (such as customers), sales, and interest collections should also be detailed. The cash outflows for meeting payables, and capital investment should also be specified.
Part 6: Actions when constraints are encountered
In this part, the actions to be taken when the constraints on strategies are encountered should be stated. These could include attempting to sell assets, managing receivables, and deferring payment of wages. For example, if there is a need to sell some property, the exact goal will have to be specified. This should include the target date for the sale of the property and how much will be received from the sale.
Part 7: Review of the cash management approach
In this part, the performance of the cash management approach should be reviewed. Considering the different parts of this review will help to refine the cash management strategy. Some of the issues to be reviewed could include:
Cash management analysis should indicate the overall success of the cash management strategy by identifying whether the plan was able to achieve its goals. Cash management analysis should also help in formulating new strategies in the event that the existing ones fail to achieve the expected goals.
Cash management involves monitoring events so that the cash management procedure is carried out properly. There are different types of events like payments, receipts and the transfer of cash. There are also the actions such as preparing cash budgets, and adjusting cash forecasts. However, cash flow’s success depends on in what form the information to be analysed is available. The central bank of any country is in control of regulating the entire country’s cash flow.
The cash flow analysis should produce data that will help to forecast on the health of the organization. It should also be used to adjust the cash management policy if there is any need for doing so. The cash flow analysis is usually carried out using the detail cash flow categories. These categories should provide a more detailed view of cash inflows and outflows.
This is a process of matching all the inflows of cash against all the cash outflows. If any funds are unaccounted for, then their source or destination may have to be discovered. This could include the involvement of the internal audit department if necessary. Any discrepancies should be reported so that corrective measures can be taken if necessary.
Cash budgeting is used to determine the amount of cash the organization should hold at a given time. It also helps in determining the amount of cash the organization will need to generate. This helps in determining whether the current cash management strategy is working or needs adjustments. In case of an adjustment, the cash budgeting process will have to be adjusted accordingly.
Cash budgeting is an essential tool for any organization that uses cash management. The cash budgets are usually classified into active and maintenance categories. Different budgets should be created for the different types of cash flows, such as for payables. The cash budget is used to analyse the forecasted cash flows. The budget helps to identify any factors that could affect cash flow. It should also be used to determine how the cash inflows and outflows are affected by the change in the cash budget.
This is a technique that is used to help ensure that cash outflows are financed as soon as possible. Payroll is one of the largest cash outflows of any company, and sometimes a delay in the time taken to collect cash for payment of wages could spell disaster for the company. Therefore, if payment of wages is delayed, it could mean that this cash will not be immediately available to the company.
This should help to ensure that there is adequate cash in the bank on the payday. The payroll budgeting procedure creates a cash requirement for payroll that matches the total amount of wages to be paid. The payroll budgeting procedure should also determine the appropriate sequence in which the wages should be paid. This is known as the priority ranking of wages.
There are two main options when creating cash budgets. The first is to use the budgeted balance sheet of the company as a starting point. This means that the company’s cash position is considered before forecasting costs and income. The second option is to use forecasted transactions during the next month as the starting point for forecasting cash flow. The cash budgets that are created using the transactions will be the basis from which the cash budgets are created using the balance sheet.
The cash flow statement is often referred to as the statement of cash flows, and it is based on the analytical principles of accrual accounting. The cash flow statement shows the differences between the cash flows forecast and the actual cash flows. Cash flow statements are divided into three categories. These are operating activities, investing activities and financing activities. These categories should be used to analyse the cash flows.
The cash flow statement can be used to identify the sources of the cash available for a company’s activities. Sources of cash that are considered in the cash flow statement include the following:
This is the timing of the cash flows for the various operating activities. The cash flow statement should show the cash flows as originating from different types of operations and the times in which they have occurred. The cash flow statement should also indicate cash balances in the bank as well as the company’s workable lines of credit during a particular time in which the cash flow statement is being prepared.
The cash flow statement reveals how long the process of preparing a cash flow statement will take. It also reveals the amount of funds that need to be liaised with providers of these funds. This statement generally requires close co-operation with the management team of the company. It also involves information such as current financial position, forecast of future cash flow and forecast of net profits.
Different organizations have different cash flow requirements due to their own unique characteristics. This means that it is important for a technique to be established that will be able to cater for each organization’s cash flow requirements. Some of the techniques are as follows:
Cash flow coverage ratio is usually calculated as soon as the cash flows from operating activities are known. This ratio indicates the number of times that the cash flows from operating activities cover the cash outflows. It is usually difficult to determine the cash flow coverage ratio exactly because forecasts are based on assumptions.
An important concept that needs to be considered when cash flow analysis is being carried out is that of inflation. The inflation rate is used to determine the amounts that will need to be adjusted. This inflation rate could be applied to the cash flows that are covered by the cash flow coverage ratio. The purpose of this is to maintain the purchasing power of the organization.
Cash flow contingent liabilities should be reviewed and accounted for in the cash flow statement. The list of contingent liabilities should be prepared from all sources. It should be considered whether or not the liabilities have a right to demand payment at some time in the future.
This is the amount of interest that is received on any cash that has been deposited in a bank. The interest rate is different each month, and this reduces the amount of interest that could be earned over time. This allowance could be made for in the cash flow statement by increasing the background assumption used for the cash flow forecast.
Cash flow from financing activities is usually the result of a company issuing additional long-term debt in the form of bonds or selling equity shares in the company. The cash outflow from financing activities refers to the cash paid out to repay any long-term debt. The cash flow from financing activities also includes the cash payments to shareholders for their equity shares.
Cash flow from financing activities indicates the cash required for financing any particular business. This information is used to determine the amount of funds that will be needed for the various business activities in the future.
Cash flow from investing activities is the cash inflow that is received from acquiring an asset. The cash flow from investing activities also includes the cash outflow for the purchase of any new asset. The cash flow from investing activities is also the total amount of money that is received from the sale of any asset.
The present worth analysis should be able to determine whether the project is worthy of investment funding. Cash flows that can be generated should be invested and used to calculate the present worth of a project. This is known as the net present worth or the present worth of net cash flows. The present worth analysis should use the same discount factor for all cash flows. This discount factor should be known as the cost of capital.
At the beginning of a year, it is common for most companies to prepare one of two financial statements. A balance sheet indicates the assets, liabilities, wage items and the capital of a company at that particular point in time. The other financial statement is known as the profit and loss account. This financial statement indicates the income and expenses for the last year.
Cash flow analysis is used to determine whether the business has sufficient cash to operate. This analysis is used to forecast the cash flow generated by operating and investing activities. Cash flow analysis is used to assist the management team who are responsible for the day-to-day operations of the business. The information could also be used to help make strategic financial decisions for the business.
This is often referred to as the cash flow statement, and it is used to forecast cash flows that are generated by operating and investing activities. The forecasted cash flows are prepared before determining the profit and loss account. Cash flow forecasting is extremely important for business because this is the information that is used to determine changes that need to be made to the company in the future.
The amount that is raised from the issuance of new debt is referred to as a cash outflow. This is typically the amount that is required to be repaid on a monthly basis. If there is a decrease in the level of cash from operating activities, then it may be necessary to obtain a bank loan.
How to select a Cash Management Strategy?
Cash management is a term used to describe the act of converting a company’s time value assets into liquid assets. To do this, a business will need to consider certain aspects such as the different uses of cash. A business will also need to have an understanding of the costs and risks involved in different cash management techniques.
A company’s cash pool is the sum of cash that is available to the business. This cash pool would be dispersed to various departments and in various locations. A company would first need to establish its various cash pools. The most common cash pools are the following.
A bank cash pool is a company’s working bank that is used for the payments to vendors and creditors. The bank cash pool is often referred to as the operating cash pool. The operating cash pool is the highest priority for payments because of contractual obligations. The operating cash pool is located physically in the bank branch that is closest to where the payment is to occur.
A processing cash pool is a company’s cash pool that is used for the settlement of intercompany payable. The processing cash pool is also known as the gross payable pool. The gross payable pool is where all of the company’s invoices are posted, and the money is removed from the bank pool.
A finance cash pool is a company’s cash pool that is used for any internal borrowing. This cash pool is used for the payment of any business expenses. The amount of money that is removed from the finance cash pool is used to determine the interest tax rate. This pool is also known as the blended cash pool because it will have money belonging to both the operating and the financing cash pools.
A “credit card cash pool is a company’s cash pool that is used for credit card transactions. The amount that is in the credit card pool is used to determine the credit limit.
A “borrower cash pool is a company’s cash pool that is used for any loans provided to the company. This will be the total amount that is still outstanding on any loans. The borrower pool is also known as the net debt pool.
Costs of Cash Ownership:
There are many costs that will be involved when a business has access to its own bank account. These costs include the following:
The bank charges that are directly proportional to the business’s account size. These fees are usually listed on the bank’s service fees sheet.