Cash Management - The Need and Importance of Cash Management
What Is The Need And Importance Of Cash Management?
Cash management involves managing cash efficiently, the proper usage of cash while assessing liquidity and the cash flow and investments.
Every business tends to focus on both short term stability and long term survival and growth and strives to maintain accordingly. If cash is managed efficiently, the company stays healthy and flexible and remains solvent. In this way, providing funds to the business as and when needed is the key to success of a business.In contrast to this, if adequate cash is not available, the situation may lead to bankruptcy - Hence the need of cash management.
Not necessarily, yet commonly, having been presented as the first item in one of the main Financial Statements, Balance Sheet, cash is regarded to be the king, as it is the most liquid asset of a company. As such, management of cash is of a great value and significance to a business.
Providing sufficient funds to a business and protecting it against the possibility of insolvency is the basic requirement of working capital management that entails cash and liquidity. In fact, there are many a reason when a business needs to be in the money always while managing it properly: A company needs to make repayment of Loans. It has to pay taxes or it is that it needs to purchase inventory or raw materials.
Moreover, holding the cash entails a precautionary measure in order to meet unforeseen events. Therefore, the cash must be managed properly and be provided for arising contingencies.
Cash management necessitates speeding cash inflows while slowing down cash outflows, but it may not be considered in isolation. No sooner do the payments come due from customers or clients than they must be collected, while constant follow ups must be maintained. It would thus lead to the maximization of collectability. Similarly, the payments must be made as close to the cut-off-date as possible, yet being benefited with the discount facility if it is available.
Precisely, cash management enables to process cash receipts and payments efficiently. If done in an efficient way, cash management leads a business towards the desired level of success while enabling it to maintain both short term stability and long term survival and growth with sound Financial health and flexibility.