All you need to know about Cash Management

Definition of Cash Management

Cash management also is known as treasury management describes the procedure of collection, administration, and use of capital to maintain a suitable level of liquidity and it includes monetary tools such as treasury bills, deposit slip and also cash market funds making the same substance for not simply individuals but organizations too.

Explanation

It is a process in which the cash is accumulated, disbursed, and invested so that there is optimum liquidity. Cash monitoring helps in optimizing profitability by enhancing cash utilization. Its also helps in creating provisions for future backups such as financial slowdown, uncollectable loans, etc

Types of Money Monitoring

Following are the types of cash management:

• Cash flow from Operating Activities: It is discovered on the cash flow declaration of a company as well as it does not consist of capital from investing.
• Free Capital to Equity: Free Flow Cash to Equity stands for the amount of cash that is available after the funding is reinvested.
• Free Cash Flow to The Company: It is used for valuation and also cash modelling.
• The net change in cash: It describes the movement in the total amount of cash flow from a particular accounting period to another.

Goals of Cash Management

The purpose of cash management includes fulfilling working capital requirements, handling unorganized prices, planning capital expenditure, ideal utilization of funds, planning of capital investment, initiating investments, and so on. The other objectives of cash monitoring are taking full advantage of liquidity, regulation of cash flows, making the best use of the value of available funds, and reducing the costs of funds.

Fundamental Concepts of Cash Money Management

The principles of cash management are-.

1. Maintaining a reduced level of inventory: Keeping a larger level of inventory can frequently lead to a scenario where cash gets needlessly stuck. Even the storage facility room gets occupied needlessly. Businesses must come up with appropriate methods and techniques to be able to efficiently keep lower levels of stock.
   
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2. Accelerating the procedure of cash receivables: The companies need to encourage their clients as well as consumers to pay their dues quicker and they must supply them rewarding discounts and similar other systems that inspire them to pay as early as possible.

Example of Cash Management

Following is ABC’s average weekly cash balances

Total: $46,000.

The annual rate of interest= 12%.

Monthly Average Cash Balance is calculated as

• Monthly average cash Balance= $46,000/ 4.
• Month-to-month average money balance = $11,500.

Monthly Return on Average Cash Balance is calculated as

• Monthly Return on Average Cash Balance = $11,500 * 0.1.
• Monthly Return on Average Cash Balance = $115.

Using this, the firm will manage the cash of its business.

Cash management Methods.

The techniques relating to cash administration are:

• One must constantly request for a landmark or deposit payment.
• The customers must be encouraged to clear their bills faster.
• One must constantly make certain that the expenditures are constantly minimum or even postponed.
• One must request the vendors to change their settlement terms.
• Finance and fulfill purchases
• Idle equipment should be put for sale or lease.
• Increase revenue margins.
• Billing factoring/ invoice marking down/ invoice financing/ sale invoices.

Different Kinds Of Cash Money Management Tools

Following are the various kinds as offered below:

• Short-term tools such as Money Market tools and also mutual funds, Treasury Bills, Certificate of deposit (CD), etc
• Examining account.
• Interest-bearing account.
• Long term low-risk cost-savings tool.

Limitations of Cash Management

• Cash management overlooks the accrual principle of the audit.
• It is historic that is, it repositions the existing info which is given in the profit and loss statement as well as the balance sheet.
• It is not a substitute for earnings and also loss declaration.
• It ignores the non-cash deals.

Advantages and Disadvantages of Cash Management

First, let’s look at the advantages.

• Cash management allows the estimation of revenues and not just profits from outstanding incomes but also in credit sales.
• It assists in discovering money embezzlement.
• It admits speeding up the functioning resources cycle.
• It aids in awarding debtors who make quicker repayments.
  
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• It accelerates the operations of a company.

Disadvantages

The disadvantages are listed as follows.

• Management of the money calls for the specified skills of the individual handling it.

• It is a time-consuming process.

Final thoughts

Cash management is also better referred to as treasury management. A treasurer of an organization takes care of the overall money management for the same. It helps in estimating the cash profits instead of revenues earned through credit history sales. It also aids in mapping money embezzlement.

It resolves all the issues relating to the shortage of working capital. It also ensures that the solvency of a business is not affected and the current value of money is better taken into use to speed up the firm’s functional activities.

For more such informative articles, you can also visit our blog section, in case you are interested in other SAP cash management topics. 

I hope that by now you have had an overview of SAP Cash Management powered by HANA. Before you enroll in ZaranTech’s certification course on SAP Cash management, do check out the tutorial for Beginners: