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Why is cash management important?  Discuss how cash and profits are different and...

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egordon6 | Student, Undergraduate | Valedictorian

Posted December 5, 2012 at 10:47 PM via web

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Why is cash management important?  

Discuss how cash and profits are different and identify methods for preparing a cash budget and avoiding a cash crunch.

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portd | (Level 3) Associate Educator

Posted December 7, 2012 at 6:55 PM (Answer #1)

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Cash Management is important because a company's level of cash on hand allows it to operate daily without relying on significant debt. Proper cash management satisfies the covenants a bank or other lender imposes on a business entity. A company can undertake short-term investments, pay its daily bills, and perform marketing initiatives and more when they have a good level of liquidity and are not constrained by cash flow problems.

Cash are funds readily available for a host of needs, but having cash on hand or readily available is not the same as profits. A business enterprise can have substantial cash on hand but also have significant payment outlays as well. Therefore, they may be spending their cash as fast as they acquire it. In fact, they may spend so much, not controlling expenses, that they may operate at a small profit, at break even, or even at a loss. Cash and expenses management, as well as a dedication to efficient, competitive operations and growing revenues is conducive to a company earning a healthy profit.

A business, whether small, medium, or large, prepares a cash budget by identifying and analyzing their cash receipts and their cash outflow. A company can stay on top of their cash situation through consistent monitoring of their cash collections and pay outs, which results, when done properly, in never being "cash poor", even during tough economic downturns. The management of expenses, incorporating efficient processes, and establishing quality cash collection procedures assists a company in being solvent with a good store of cash on hand.

A company learns much from preparing and analyzing their Cash Flow Statement. This statement reports the cash garnered and spent during a specific time period or accounting period. A business can study this statement to see where they've been wasteful with money. They can then put in place systems, policies, and procedures, such as better inventory purchasing and pricing to help them improve their cash position.

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