Working capital — the money tied up in day-to-day operations — plays a major role in a company’s cash flow. Even profitable businesses can struggle if too much cash is trapped in slow-moving inventory, overdue customer invoices, or inefficient payment processes.
Improving cash flow starts with optimizing the components of working capital. This includes speeding up collections by tightening credit terms, following up consistently on overdue accounts, and offering convenient payment options. On the inventory side, businesses can free up cash by reducing excess stock, improving purchasing practices, and forecasting inventory needs more accurately.
Managing payables is another powerful tool. Extending payment terms (where appropriate), scheduling payments strategically, and using electronic payment systems can help a business maintain healthy cash levels without disrupting relationships with vendors.
When all these elements are managed well, the business generates more available cash — cash that can be used for growth, emergency needs, or long-term sustainability.
The Nature of Cash Management
Cash management involves overseeing every cash inflow and outflow of a business with two goals:
- Ensuring sufficient liquidity
- Maximizing use of excess liquidity
Key Aspects
1. Information Aggregation
You cannot manage cash without knowing:
- where it is
- when more is coming
- when it is needed
This requires strong systems that report cash, receivables, and payables accurately.
2. Liquidity Management
Once cash flow information is known, the business can:
- invest excess funds
- borrow when needed
- ensure cash is always available for operations
3. Risk Management
The company must evaluate:
- financial risk of partners
- foreign exchange exposure
- interest rate exposure
Risk management is less urgent than liquidity, but still essential to avoid major losses.
Cash Management Activities Table
(Originally provided)
| Cash Management Area | Type of Activity or Knowledge Area |
|---|---|
| Information aggregation | The cash forecast (Chapter 2), The bank reconciliation (Chapter 3), Information requirements (Chapter 4) |
| Liquidity management | Cash receipts, cash concentration, payment issuance, working capital, investment management, obtaining funding, credit rating agencies, clearing & settlement systems |
| Risk management | Foreign exchange risk, interest rate risk |
Companies with subsidiaries or international operations have far more complex cash management requirements. Those operating from a single location focus mainly on cash forecasting and liquidity practices.