What Is a Cash Management System?
Cash flow is one of the most crucial indicators of the financial health of a business. Maintaining and leveraging cash information is key to the growth of any business. A cash management system helps finance professionals do just that.
Cash management systems help record, track, forecast and report the cash flows of a business. They follow the movement of cash in and out of the company across multiple channels, branches and structures.
Understanding the Cash Management Process
Cash is the main asset of an organization. Companies use it to conduct business, pay employees and fulfil various obligations regularly. Hence, cash inflows and outflows are everyday occurrences for an organization.
For businesses, cash management is extremely crucial to financial performance and stability. Also known as treasury management, corporate cash management is generally the responsibility of corporate treasurers, chief financial officers (CFOs), business managers, etc. Some organizations also outsource cash management tasks to various service providers.
The cash management process mainly includes overall cash management strategies, cash flow management, stability analyses, etc. Cash management professionals regularly monitor and analyze various KPIs and metrics to assess the organization’s financial needs. They do so on a monthly, quarterly or annual basis.
Cash management’s most salient part is monitoring the cash flow statement. Since the cash flow statement records all business transactions, it helps track accounts receivables, payables, investing amount, financing amount, etc. In a nutshell, the cash flow statement tells you how much readily-available cash the organization has at any given time.
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Components of Cash Management Systems
A cash management system is made up of majorly two components: hardware and software.
The hardware component includes physically accessible components like cash registers, cash counters, banknote recyclers, etc. The hardware components accelerate physical cash-handling activities. For example, the cash counter automatically counts how much cash you have put in the system. This process is faster and much more accurate than humans counting cash manually.
The second main component of the cash management system is software. These include the programs that automate important cash management processes like cash tracking, payables and receivables management, analytics, reporting, reconciliation, etc.
Types of Cash Management Systems
There are various cash flows that a company must monitor to ensure an efficient cash management system.
1. Cash flow from operating activities
This cash management type explains and analyses the cash flow statement of the company. It details the sources, outlets and incomes from ongoing company operations. It outlines the trends in working capital and helps you analyze the financial health of your company.
2. Free cash flow to equity
This is the cash income of a company. Shareholders can receive parts of this amount if the business performs well. It helps you determine the financial standing of the company. To calculate free cash flow to equity, take the cash income from business activities and deduct capital expenses from it.
3. Free cash flow to the firm
This is the amount of cash flow from activities attributed to distribution after taxes, depreciation, working capital and investments are covered. It is used for valuation purposes or financial modeling of the company.
4. Net change in cash
This is the sum by which the cash balance of your business rises or reduces in a specific accounting period. It represents the flow of cash from one accounting period to the next.
Why Do You Need a Cash Management System?
Every business needs to manage its cash strategies to optimize its earning potential and maximize its savings. A streamlined and efficient cash management system can help a company adopt better strategies, control its spending, devise more accurate forecasts, establish the right KPIs, etc.
Hence, deploying the right cash management software is imperative in an organization. It helps you capture accurate data, produces comprehensive analytics and reports and enhances communication and enforceability of cash management policies across the business.
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Terms Important for Cash Management
1. Working capital – It is the total amount of current assets the company has minus the current liabilities.
2. Current ratio – It is the ratio of current assets to current liabilities.
3. Quick liquidity ratio – Quick ratio measures the company’s ability to retire or fulfil its current obligations immediately. It is measured by the ratio of current assets minus inventory to current liabilities.
Features of Cash Management System
1. Cash tracking
A cash management system offers real-time tracking of cash movement on operations, investments, and financing activities. It tracks balances across banks, currencies, regions, etc. Cash management software also tracks the cash transfer status. It also automatically segments and categorizes cash transactions.
2. Payables and receivables management
A cash management system can double up as a payables and receivables management solution. A cash management system can simplify the process of administering the company’s outstanding liabilities and debts to vendors for purchasing various products on credit.
A cash management system can help you reconcile expenses across your internal records. It checks costs across various data points and fetches details into a single document.
4. Analytics and Reporting
A cash management system uses historical data and current cash transactions and categorizes them according to period, account, entity, region, etc. It facilitates cash flow and liquidity forecasting.
A cash management solution also presents reports and detailed analyses that can help you analyze customer, employee, and company payment behavior patterns. It lets you review and study important ratios like working capital, liquidity ratio, etc.
5. Liquidity management
Cash management systems automate critical parts of liquidity management, like working capital calculation. This helps you plan your company’s operating, financing and investing activities. It also facilitates the recording and monitoring of current and quick liquidity ratio monitoring, etc.
6. Security and protection
Cash management systems come with various role-based controls that can help you maintain the security of your business. It protects your data from breaches and contamination.
Cash management software protects your data through encryption and regular scanning. Its automation features eradicate problems that arise from manual processes and prevent expense fraud.
7. End-to-end automation
Cash management automation helps eliminate many time-consuming tasks in various cash management processes.
As organizations expand, their cash inflows and outflows increase. Consequently, their need for a robust cash management system gets more complex and urgent.
An automated cash management solution provides easy scalability of the cash management processes. It allows businesses to record, retain and analyze a growing transaction data repository.
9. Multiple currencies
Cash management systems are essential for businesses that operate in more than one country. They enable efficient multi-bank connectivity, help record and analyze cash from multiple currencies, and present unified reports of all transactions.
10. Predictive analysis
Certain cash management solutions offer machine-learning-driven predictive analyses and forecasts. These can give you near-accurate insights into the company’s future financial performance and cash flow behavior. This, in turn, can improve your liquidity planning and help you avoid last-minute cash surpluses and deficits.
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Advantages of Cash Management System
1. Clarity of cash flow cycle
Cash transactions are time-sensitive, and hence a keen understanding of transaction timings is key to the cash management process. Knowing when you need to clear the payables and when you will expense certain expenses is crucial.
However, when businesses are in a rapid-growth phase or going through a management change, keeping track of all payables and receivables becomes hectic. Eventually, the company runs out of cash due to missing payments or over-purchasing inventory.
A cash management system can help avoid this by automating the most crucial and time-sensitive tasks of the cash management process.
2. Accuracy and centralization
A cash management system ensures that all processed transactions have accurate data inputs. It also centralizes data across multiple input conventions to unify the processes across all the verticals and branches of the organization.
3. Increased productivity
Automation in the cash management processes frees up the employees in charge of cash flow and liquidity management to focus on more strategic tasks.
4. Increased profitability
A cash management solution can help you increase returns on idle cash. It increases spending visibility and control over cash inflows and outflows, in turn growing savings and the company’s overall profitability. It also allows you to secure your funds against unprecedented economic situations.
A cash management solution can help you save on foreign exchange transactions and cross-bank fund transfers.
5. Helps in funding operations and expansion
A cash management system helps ensure that your organization has funds available to fulfill operational requirements. It also facilitates the planning of long-term organizational expansion.
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Challenges of Cash Management System Process
1. Standardisation and centralisation
Standardizing and centralizing information, data points, and processing methods is difficult in cash management systems that pull information from multiple ERPs, accounting systems, and departments. This can cause confusion amongst the stakeholders and cause delays and errors in the system.
2. Manual processes
Businesses that still use manual systems to manage cash are vulnerable to many human errors like data entry mistakes etc. The manual process also requires multiple checks and validations which takes up crucial man-hours.
3. Insufficient cash management skills
It is imperative for businesses to have leadership that can efficiently manage cash and optimize various cash management processes like accounts receivable, payable, working capital management, etc.
Having incompetent officials helping with cash management can have a domino effect on the organization’s financial performance. Even intelligent software can receive the wrong programming and produce erroneous outputs if the people managing the cash strategy don’t understand what they are doing.
4. Poor investment management
When companies invest capital in projects that don’t yield the desired results, there is a net loss on the cash flow statement. This net drain on the organization’s cash balance can be a blow to the financial health of the company and cause long-term cash management issues.
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Cash Management System: Best Practices
Having an efficient cash management process ensures the long-term financial stability of the company. Every organization should remember a few best practices while setting up their cash management processes.
1. Monitor cashflows regularly
It is essential to define the metrics and KPIs of the organization that can help you monitor the performance and analyzes cash flows efficiently. Ensure that your metrics are consistent across phases and are accessible at any given time.
2. Identify and eradicate issues early
It is easier to solve a problem if you detect it early. Monitoring your cash performance frequently helps with that. Even vendors and banks are more receptive to problem resolutions when informed in advance.
3. Frequent cashflow projections
Monitoring and analyzing cash inflows and outflows and using intelligent analytics to project future cash flow can ensure you don’t encounter unprecedented risks or shortages.
A cash management solution helps you perform frequent projections by giving you a complete and accurate overview of payment histories, expense and income averages and trends, cash history, etc.
However, having internal data is not enough while making cash projections. Ensure that you have considered the current economic and market conditions and every possible risk your organization might encounter.
4. Update your budget according to performance
Creating and sticking to a budget helps organizations maintain their cash levels, avoid overspending and increase savings. However, there is always some imbalance between predictions and actual performance.
Hence, it is essential to update your budget as you go through a specific budget period according to the actual performance of your organization.
5. Plan your growth
Business growth is one of the few primary objectives of any organization. However, growing too much too fast can be risky. Businesses should analyze their resources and judiciously plan their growth accordingly.
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3 Ways to Make Cash Management More Effective For Your Business
1. Manage operating costs
Operating expenses are the costs that directly fund the day-to-day functioning of an organization. They can deplete the cash reserves and cause budget leakages if not managed well. Ensuring that the organization’s operating expenses are handled optimally can help you increase your monthly savings.
2. Utilise payment terms to your advantage
While clearing bills as and when they come seems like a good idea, in hindsight, you might realize that waiting until the due date to pay suppliers is not a bad idea. Planning supplier payments according to your company’s cash reserves can help you retain the cash for much longer. This may help you avoid cash flow issues in case payments come in late.
3. Optimise the accounts receivable process
An unprecedented delay in accounts receivable can cause strain on various business functions. Businesses must make do with depleted cash reserves when payments get stuck for a long time.
Having a robust process for accounts receivable is hence crucial for an efficient cash management system. Ensure that your customers receive invoices as soon as goods or services are delivered.
The invoices should clearly mention the payment terms, including the due date and preferred mode of payment. The receivable management team should immediately follow up in case of delays and ensure a regular inflow of revenues as often as possible.
Read also – How Does Invoice Automation Work?
How Much Does a Cash Management System Cost?
Depending on the size of your organization, the number of employees, and the features you need, the cost of deploying a cash management system can be around 50,000 USD to 1,50,000 USD.
Cash management systems have various costing models across regions and countries. The final cost to the company will be determined by the service provider and the company’s final needs.
In short, a cash management system records and tracks cash transactions. It facilitates multiple crucial financial analyses that help ensure the company’s financial health. The main benefits of the cash management system are increased productivity and profitability. Cash management professionals should keep the best practices in mind to ensure efficient and optimal cash management.
Cash Management System – FAQs
1. Why do we need a cash management system?
A cash management system automates parts of cash management processes like tracking transactions, payables/receivables management, reconciliation, reporting, liquidity management, etc. It frees up time for professionals to work on strategic endeavors, reduces data contamination and, in turn, increases the overall savings of the organization.
2. What are the types of cash flows?
The three types of cash flows are:
- Cash flow from operating activities.
- Cash flow from financing.
- Cash flow from investing activities.
3. What are the three essential components of cash management?
Inventory, accounts receivables and accounts payables are the main components of cash management. Effectively managing these three elements helps avoid significant long and short-term risks.