Strategies for Managing Cash Effectively

Cash Monitoring & Controlling

Cash budget and projection for the receipts and payments should be produced annually and monitored periodically as a way of managing cash effectively. The cash budget and forecast should be prepared separately for the same period under consideration.

To ensure the budget is not exceeded, the actual cash receipts and payments, including the forecast, should be benchmarked against the budgeted estimate. Where there is difference between budgeted estimate and the actual receipt or payment, the variance should be analyzed, and justification should be provided.

Monitoring and controlling cash receipts and payments will help businesses to know when there is a cash flow surplus or shortfall, and in effect, improve working capital.

Investing Surplus Funds

Managing cash balance is essential for any business. When there is idle fund that is not available for immediate use, the funds should be invested in short-term marketable securities including treasury bills, fixed deposit account, etc. to earn additional return.

Holding excessive cash balance is an unproductive way of managing assets. Any substantial idle funds should be invested to generate additional returns for the company rather than keeping them in the bank account, yielding zero return. The opportunity cost of not investing idle funds is high and can be damaging to the value of the business.

In determining the amount of available cash to be invested in short-term marketable securities, high consideration should be given to the working capital requirements of the business.

Establishing A Petty Cash System

A small amount of money should be set aside for the day-to-day disbursement of incidental expenses such as supplies, stationery, printing, transport, refreshments, fueling, reimbursement, etc. This will help the business to minimize bank charges arising from frequent bank transactions. The amount to be kept will depend on the size of the business. A large company with different autonomous units will require more cash than a relatively small company. In this case, adequate controls should be put in place to guide against theft and misuse of assets.

However, maintaining, recording, and reconciling petty cash requires extra work, and can create additional burdens for an employee. Though petty cash is convenient and can be easily accessible for impromptu expenses, but the risk of fraud, misuse, theft, abuse, and evolving technologies (electronic wallets, contactless transactions) have rendered it almost obsolete.

Offering Trade Discount

A trade discount can be extended to customers to encourage prompt payment to improve working capital. Early payment discount can attract on time settlement of credit purchases by customers. This will in turn, make cash readily available for use of the business.

Automating Invoice Processing

Companies can automate their invoice processing to achieve efficiency and optimum cash conversion cycles. This is because manual processing of invoices may cause delays in sending invoices to customers, loss of invoices, and inefficiencies arising from a high volume of invoices to be processed. Automating invoice processing can help track slow paying customers and request for timely settlement.