Importance of Cash Management
1. Liquid Asset: Cash is the lifeblood of any business as it is needed to acquire resources, make transactions, pay off debts, etc. A business will not generate profit if the cash is held idle and on the other hand, if there is a cash deficit then it may cause an irreplaceable loss to the business. Therefore, proper management of cash flow is essential to have a profitable business.
2. Adequacy of Funds: The availability of cash is necessary for purchasing assets, making investments, reducing liabilities, etc. A business needs to make sure that there are adequate funds to meet its current obligations and make proper reserves to meet any future contingencies.
3. Working Capital: As cash is the most liquid asset, it has a major role in working capital management. Hence, the business needs to manage cash in a way that maintains the liquidity position without affecting profitability.
4. Reducing Risk: With accurate forecasting and making cash reserves accordingly, a business can overcome unforeseen circumstances. It helps in assessing and reducing the risks related to cash and implements internal controls to safeguard cash assets.
5. Planning: It involves anticipating when the organization may need additional funds or when excess cash may be available. Proper planning makes the entity ready to face challenges and unwanted situations.
6. Relations with Stakeholders: This strengthens the relationships between the company and its stakeholders and leads to more favourable terms. A business can enhance its credibility by timely payment of bills, and salaries, and by performing other financial obligations