Functions of Cash Management
Cash management plays an important role in managing the finances of businesses or individuals. As discussed above, this involves accumulating, managing, and disbursing cash to create liquidity in the business and boost profitability. The main functions of cash management are,
1. Liquidity Management: Liquidity means the amount of cash and cash equivalents held by a company for its day-to-day operations and smooth working. Cash management ensures that there is enough cash in hand to meet daily operational needs. It also balances the need for liquidity with the opportunity cost of holding idle cash.
2. Receivable Management: Cash management plays the function of faster recovery of receivables to avoid a cash crunch and to maintain liquid cash. If the average time for recovery is shorter, the organization will have enough cash in hand to pay off its debts.
3. Investments: It is important to invest the surplus cash in hand wisely. The company needs to look for various short-term investment alternatives to utilize surplus funds. Management helps in investing with maximum returns without compromising the liquidity of the business.
4. Compliance: Effective cash management shall fulfill all the compliance with regulatory requirements related to cash handling and reporting. It keeps us informed about changes in financial regulations that may impact cash management practices.
5. Risk Management: Businesses need to monitor their system timely to avoid the risk of bankruptcy. Cash management assesses and reduces the risk related to cash and forms internal controls to safeguard cash assets.