An overview of cash management, its working and importance

6 December, 2024

Synopsis:

• Cash management plays a vital role in optimising cash utilisation.
• Prudent cash management helps HNIs and other individuals manage daily expenses, build an emergency fund and invest in various financial instruments to build wealth in the long run.
• HDFC Bank's comprehensive cash management services allow corporations to smooth their fund flows, achieve efficiency in payments, and speed up collections.
  
  

Introduction

Be it individuals across income levels - including high net-worth individuals (HNIs) - or organisations, everyone needs to understand the concept of cash management. In accounting, cash management refers to overseeing an organisation's cash flow to ensure it has enough money to meet its financial obligations and operate smoothly.

For individuals, including HNIs, cash management is the process of optimising and managing cash flow in a manner that they can meet their day-to-day needs and various short and long-term financial goals. Read on to know the nitty-gritty of cash management and its importance.

What is cash management?

Cash management refers to managing the cash flows to ensure enough cash is available to meet financial obligations. It also involves maximising the return on any excess cash. Optimum cash management helps individuals and businesses to fulfil present needs while meeting unexpected expenses. There are various aspects to cash management, and here's how it works:

• Forecasting cash needs
  The first step in cash management is determining how much cash you will need over a specific period. For businesses, it involves factoring in various operational expenses, while for HNIs and other individuals, it entails factoring in their fixed (or necessary) expenses and discretionary (or non-necessary) ones.
  
  

• Analysing present cash-in-hand and available in bank accounts
  The next step is to analyse the cash available in hand. Find out how much you have in your bank account and how much you are expected to receive over the next few months. For businesses, it entails the payments they can expect from customers, while for individuals and HNIs, it's their income and any windfall they can expect to receive in the coming days through bonuses, if any.
  
  

• Implementing prudent strategies to optimise cash flow
  Once you forecast your cash needs and analyse the present cash-in-hand, the final step is implementing a strategy that balances inflows and outflows. For businesses, it can be negotiating payment terms and getting the pending payments on time; for individuals, it can be keeping non-necessary expenses on the back burner and prioritising essential ones.
  
  

Importance of cash management

Now that you know what cash management is, let's see its importance:

• Liquidity management
  Optimum cash management helps to manage liquidity. It means you can access cash whenever needed. By effectively managing their cash flows, businesses can make sure they have enough liquid assets to meet short-term obligations and day-to-day expenses. This not only helps in smooth business operations but also in cashing in on any market opportunity.
  On the other hand, it ensures individuals, including HNIs, can maintain financial stability and be on a solid footing in case of unexpected expenses coming their way.
  
  

• Reduced borrowing
  This is another benefit of prudent cash management. By effectively managing their cash flows, enterprises can minimise their reliance on external financing options such as loans or lines of credit. When a firm has a healthy cash reserve and efficiently collects payments from customers, it can cover its operational needs without resorting to borrowing.
  Similarly, optimal cash management can lead to reduced borrowing needs for individuals. By budgeting effectively, tracking expenses, and saving for future goals, you can build up a financial cushion to cover unexpected expenses or emergencies without resorting to expensive loans. This not only saves money on interest payments but also reduces the risk of falling into debt traps and facing financial stress.
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• Optimised cash utilisation
  Cash management plays a vital role in optimising cash utilisation. For corporates, effective cash management involves deft balancing incoming and outgoing cash flows to maximise the utility of available funds. By forecasting future cash needs and monitoring cash inflows and outflows, businesses can make intelligent decisions about when and where to allocate resources. This helps them minimise idle cash sitting in low-return accounts.
  On the other hand, prudent cash management helps HNIs and other individuals manage daily expenses, build an emergency fund and invest in various financial instruments to build wealth in the long run.
  
  

In conclusion

As evident, cash management is essential for both businesses and individuals alike. It helps both to be on a solid financial footing. 

HDFC Bank's comprehensive cash management services allow corporations to smooth their fund flows, achieve efficiency in payments, and speed up collections. This helps improve bottom lines and aids in intelligent decision-making. Our cash management services (CMS) offer you a competitive advantage as they are supported through a network of over 3000 interconnected branches. To learn more about our CMS services, click here. 

Disclaimer: *Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances.