Rose Report: Issue 18

Cash is King: Best Practices for Cash Management

issue18-pic-story3You often hear the saying, “Cash is king.” And nowhere could that be truer than in a business setting. Cash management, or forecasting the ongoing cash position of an organization, is one of the most important tasks that executives face.

At the most basic level, the goal of cash management is to maximize the availability of cash while still meeting obligations and avoiding the risk of insolvency. Cash management drives all the decisions that an organization makes—from financing and capital structure to growth objectives.

There are two types of cash management: tactical and strategic. A company will decide which strategy to employ based on its size, maturity, industry, goals, and other factors. For example, a young business during the early stages of growth—or a mature business during a period of rapid expansion or contraction—will employ tactical cash management to ensure that funds are available. The key of tactical cash management is appropriately managing working capital so that it can help meet organizational goals.

Strategic cash management, on the other hand, minimizes the organization’s overall cost of capital to drive the bottom line. When employing this strategy, a company would keep in mind that equity capital is more expensive than debt, as excess cash earns less return than cash invested in the business. The goal of this style of cash management is to put your cash to work for your business. Writes online business magazine Inc.com: “Cash flow management can be practiced to a point where every available dollar is at work either covering payment of checks or producing income.”

Regardless of which cash management strategy a company employs, effective controls over cash are critical and can impact everything from earning the trust of investors and lenders to attracting talent. Poor cash oversight increases risk which can lead to increased costs which can decrease the company’s ability to attract and retain the talent it needs to grow. “Companies suffering from cash flow problems have no margin of safety in case of unanticipated expenses,” writes Inc.com. “They also may experience trouble in finding the funds for innovation or expansion. It is, somewhat ironically, easier to borrow money when you have money.”

How can a company help enhance control over cash? One best practice is to accurately assess your cash management needs by tying the budget to a cash forecasting tool. It’s also smart to take advantage of cloud-based solutions such as RFSCashreceipts and RFSPayables. These tools provide an audit trail and history of every disbursement and receipt. Cloud-based solutions also offer real-time recording of your company’s financial activity, giving you insight into your cash position at any point in time.

Finally, a good cash management strategy involves coordination and communication between treasury and operations. Cash forecasting is not a luxury; it is a necessity. Understanding your cash position helps you attract capital to finance growth and attract and retain the talent to achieve growth. Smart cash management is the best way to ensure that a company meets its goals; it’s also the best way to create a solid roadmap for the future.