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Cash management: attempting to foresee profitability



Frequently referred to as the blood which fuels an organization’s operations, cash is an economic reality that cannot be overlooked. Fulfilling cash requirements on a short term by either collecting, managing or investing is a fundamental responsibility of business managers and corporate treasurers.

Successful cash management relies on the prior understanding and acknowledgement of business objectives as part of an organization’s structural complexity. The cash management function of a company, although not isolated from other organizational activities, is frequently regarded as a separate monitoring and control endeavor.

The financial department is most frequently regarded as one that requires extensive resources in terms of specialized personnel and high expertise. The matter of cash management is perceived as particularly specific and, thus, secluded from other aspects concerning the company’s trajectory towards improvement. However, we sometimes forget that, although hidden from the public eye, it remains the engine that keeps processes functional.

Managing cash is not something that can be treated lightly. It is a matter of mathematics, statistics and financial forecasting. Moreover, it requires further investigation into the realm of economics, as it is a key element of an organization’s financial solvency, stability and profitability. In terms of progress, cash management is a primary concern for small and medium sized businesses because they have to deal with significantly high, up-front costs while suffering from restricted access to financing opportunities.

Adequate management of limited cash resources enables a start-up company to avoid insolvency by focusing on cash flow measurement at all times. #Cash flow yield, %Cash collection rate, $Cash outflow, $Cash inflow and $Cash-at-hand can be appropriate indicators of an organization’s capacity to meet unforeseen expenses or handle payroll.

A rule of thumb within the entrepreneurship world says that it takes at least three years for a company to break-even. As appealing as it may sound, ownership is a tricky business. Without proper cash management, it can lead to actual personal bankruptcy. Tracking cash inflows and outflows should be key practice in adequately managing income and expense, while also providing an opportunity for both short and long-term forecasting.

Investment possibilities should be sought after during the leading years of entrepreneurship, as access to bank credit may be limited. A repository of financial data for the first years as a business owner should include a business plan with financial projections, a break-even analysis, balance sheets, loan applications and an overall evaluation of capital assets. Benchmarking should be used when assessing the financial practices of surviving companies together with their suggestions for cash management and solvability measurement.

As we progress towards the corporate business environment, cash management becomes a strategic endeavor and may evolve into a treasury function. Because it constantly interacts with other organizational faculties, effective corporate cash management relies on the provision of overflowing information which, ultimately, ensures its efficiency.

Cash management at multinational level depends on the strength of the cash flow, on the value of the balance sheet and the level of exposure within the cash cycle. Understanding currency, trade markets and risk, as integrated functions of cash management, may well become a practice of corporate financial performance measurement and assessment. $Cash burn, #Cash conversion cycle, $Liability adjusted cash flow yield, %Cash flow forecast error, %Bad debt expense and %Cash factor analysis become just a few of the numerous performance indicators a corporate financial department has to deal with.

Target achievements realized by the big players of corporate markets worldwide are not just a result of performance measurement, but also of performance forecasting. Profitability is an intricate provision of both performance achievement and an intrusive predictive analysis of forecasted financial figures.

Within a corporate cash management process, the operating cash cycle is closely monitored and technological support is mandatory. A comprehensive financial database ensures the flow of information throughout the organization, and measures unforeseen changes in the balances that it monitors.

The complexity of the businesses we run guide us through our unique cash management practices. Although a pattern for measuring financial performance can be identified by using standardized performance indicators such as $Cash flow return on sales, successful cash management may be, to all of us, a question mark as it is a unique practice employed to avoid bankruptcy.


Back, F.P. (1997), Corporate cash management: strategy and practice

Fontinelle, A. (n.d.), Starting a small business: making the leap

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