How Cash Management Can Generate More Profits for Your Business

A company’s financial stability is indeed a challenging peak to reach. But you can only go up to that peak if you have a strong foundation.

So what’s the foundation of financial safety? The answer lies with cash management. How you handle your cash flow ultimately influences financial stability. You can manage your business’ cash with cash flow management software. 

The primary goal of cash management is to maximize liquidity and minimize the cost of funds in the checking account.

Cash is the primary asset for fulfilling financial obligations; it needs to be managed to maximize earnings. In turn, it will positively impact the growth of your company.

Cash management is also known as treasury management. The business managers, treasurers, and chief financial officers (CFOs) of a company are responsible for strategizing cash management, related responsibilities, and stability. Many organizations choose to outsource this to service providers. Nevertheless, responsible individuals track vital metrics and daily plans for cash management.

What is a cash flow statement?

Cash flow statements are an integral component of organizational cash flow management. While it gets reported to stakeholders weekly, monthly, or quarterly, some parts are tracked internally daily.

Cash flow statements include the cash received from accounts receivable, cash paid to the accounts payable, cash paid for investments, online banking, and cash paid for financing purposes. It lets you know how much cash you have readily available.

Investing cash flow statement

This section of the cash flow statement looks at cash flows from investing (CFIs), which is the outcome of investment gains and losses. Expenditures from properties, plants, and equipment are also included. Accounting analysts seek to find changes in capital expenditures (CAPEX) here.

An increase in CAPEX means that there’s a cash flow reduction. This is not, however, a bad thing. It shows that a company actively invests in future operations. What’s more, companies with high CAPEX are usually the ones that grow.

Investors prefer that companies generate cash flow from business operations, not investments and other activities.

Financing cash flow statement

Cash flows from financing (CFF) provides a summary of the cash used in financing. It measures the cash flow between a company, its owners, and lenders.

Accounting analysts use this section to determine the amount of money the company pays through dividends or shares and how a company raises cash for operational growth.

The cash incurred or paid from fundraising gets listed here, along with loans and payments. If this is a positive number, it implies that more money is coming in than going out. The company pays back loans, makes dividend payments, or stock buybacks when this number is low or negative.

Operating cash flow statement

This section covers cash flows from operating activities or CFOs. It includes transactions from all business activities. It starts with net income and conforms all non-cash items to cash items involving operational activities. This statement provides a company’s net income in the form of cash.

The data in this statement originates directly from a company’s primary business activities. These activities include buying and selling inventory and supplies along with salary payments. No other forms of payment are included in this statement. 

Why is cash flow important?

There’s a big side to business that involves being prepared for the unexpected. A healthy cash flow system puts a company in a secure place when the unpredictable happens.  

Averting crisis

Since a cash flow statement gives business stakeholders an understanding of whether they have a shortage or excess cash, cash flow reports help manage crises. 

If a manager projects a cash shortage in your company's future, they could help the company avoid challenges ahead of time by prioritizing bill pay, overdraft, partnerships, and streamlining the cash management overall. 

Better cash planning

Businesses create cash flow plans to ensure success through bill payments, credit card payments, and direct deposits. Despite this, there are moments when businesses cannot achieve their cash plans perfectly or meet objectives.

Cash flow statements help companies better examine whether their cash planning was functional by allowing managers to analogize estimated cash flow numbers to the existing cash flow.

Quick planning

All companies must be solvent to dodge bankruptcy and honor commitments, like paying salaries. Since cash flow statements provide a detailed report about how much cash a business has, they help managers keep track of spending.

Boosting cash inflow

While profits help with generating cash, there are different ways. Using current inflow and outflow data, businesses can focus on creating cash from other activities. For example, if a company feels they spend a lot of money on inventory management, it can create more currency by optimizing operations.

Better insight into cash balance

Business owners and stakeholders must understand the cash amount they require to operate. If companies have extra cash, they have investment options. On the other hand, they can rely on lenders to reach a proper minimum balance if they are in a deficit – although this creates an interest rates issue.

Working capital

Working capital means the funds available to manage everyday expenses, disbursements, or ATM reimbursements. Cash flow statements help employees, investors, and stakeholders examine the working capital in their company. This makes it easier for businesses to boost their operations to improve cash flows.

Long-term planning

Cash flow statements help plan in the long run. A company's growth depends on accurate financial forecasting, and cash flow statements help identify specific changes. These changes bring businesses to a solid financial position. Cash flow statements allow managers to understand what to prioritize and what not.

Insight into spending activities

Cash flow statements give a picture of payments that don’t reflect a typical profit and loss statement. For example, if your company takes out a loan, its payments wouldn't be included in a profit and loss statement. But it gets included in a cash flow statement, so you know how much actual cash your business has in its business checking account.

A cash flow report can give you a clear picture of outflow if you want to know where your business spends the most. Being on top of this positively affects your credit line.

Types of cash management

There are four different types of cash management:

• Net change in cash is the change in the total amount of cash flow from one accounting period to another.

• Free cash flow is used in valuation and financial modeling. 

• Free cash flow to equity represents the total amount of cash available after capital is reinvested.
• Cash flow from operating activities is found in the cash flow statement of a company. It doesn’t consider the cash flow from investing.

How does cash management work?

In practice, lots of factors influence the way that cash management works. It also varies from country to country.

If you had to codify some factors, here are four of them that decide how cash flow works:

• Form of payment: The mode of payment, either through cash, check, or electronic transfer
• Payment mechanisms available: The different handlers of payments, such as the central bank and commercial bank, consider whether the payments are centralized or dispersed
• Establishments responsible for handling cash balance: Examples of establishments accountable for managing cash balance include the local government, ministries, or the treasury
• Market development: How the market development stands, along with the depth and liquidity of government bonds and money markets

Cash management services work differently in different economies, depending on their size. In developed economies, the adopted budget provides an accurate revenue forecast and what will most likely be paid as expenditures for the year. There are a lot of systems in place to manage commitments and payments.

Governments hold departments accountable for not staying within budgets. In many cases, this can be made easier with budgeting and forecasting software.

When revenues are higher than expenditures, the balance is invested to earn interest or used to pay other debts. On the other hand, when expenditures are higher than revenues, the government issues securities or borrows money from other markets to make up for the difference.

There are two common ways developed countries try to minimize interest.

One way is that cash balances get pooled into a single treasury account. This allows cash managers to use cash surpluses to cover the shortfalls automatically. In general, it reduces the need to borrow. Cash managers need to forecast the cash flows in and out of the single treasury account to identify how much the government needs to borrow if needed.

Using this information, the government can engage actively with debt markets by providing information on different types of debt.

Cash management financial services in low-income countries work differently.

Countries may rely upon donor financial institutions to fund large proportions of the budget, which is often uncertain. This makes the gap between revenues and expenditures at any given time significant and unpredictable.

Donors may also require separate bank accounts or other arrangements such as wire transfers to handle their funds, making this money less fungible across government accounts.

If the forecasted revenue fails to materialize, it creates pressure to identify savings when planning the budget. You may pressure the accounting or finance department to find money from powerful spending entities. 

Systems for controlling spending by line ministries may also be ineffective: for example, churches may enter into commitments without prior authorization to spend.

The institutional architecture necessary for modern cash and debt management systems may also be absent in low-income countries. Governments in such countries typically cannot rely on a developed banking sector and deep money markets to access finance when needed. For instance, most inhabited islands in Kiribati don’t have bank branches, so the government physically keeps money in cash chests.

Without electronic bank transfers, cash management focuses partly on moving this money between these cash chests.

Cash flow vs. profit

Cash flow is not the same as profit but has similarities; hence, many confuse the two terms.

Cash flow is the money that flows in and out of business.

Profit measures a company’s success and how much money it makes. It’s the amount of money that remains after a company pays off existing obligations.

Investors and business owners often search for a particular metric to understand the solidity of a company. They might want one item in the financial statement to show whether they should invest or opt for different business strategies. In this instance, cash flow and profit often collide with each other.

Both cash flows and profits are essential. As an investor, business owner, employee, or stakeholder, you must clearly understand both metrics and how they influence a business's financial health.

Moving forward

Combined with profits, cash management provides a clear picture of the money flowing in and out of a business. Being on top of bill payments, loan repayments, and salaries, you can ensure a positive impact on the cash flows in your company.

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