{"id":31050,"date":"2020-04-20T15:00:06","date_gmt":"2020-04-20T09:30:06","guid":{"rendered":"https:\/\/enterslice.com\/learning\/?p=31050"},"modified":"2022-09-13T11:14:38","modified_gmt":"2022-09-13T05:44:38","slug":"management-of-cash-flows-the-lifeline-of-business-organization","status":"publish","type":"post","link":"https:\/\/enterslice.com\/learning\/management-of-cash-flows-the-lifeline-of-business-organization\/","title":{"rendered":"Management of Cash Flows: The lifeline of a business organization"},"content":{"rendered":"<p class=\"has-drop-cap\">All businesses, whether large\nand small, rely on inflows of cash emanating from sales, investments, loans,\nand other sources. These cash inflows are offset by cash outflows, or\ndisbursements needed by the enterprise to fund its material inventories,\npayroll, capital expenditures, investments, and other operational expenses.<\/p>\n\n\n\n<p>Cash flows represent the lifeline of any business, and positive cash flow is necessary for the survival of a business entity. However, maintaining a positive balance of cash flows can pose a challenge for the business and its management. When a business runs into <strong>cash flow challenges<\/strong>, it is not able to pay its routine bills on time, thus, risking a decrease in its credit line or higher interest rates.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>The Need for Cash<\/strong><\/h2>\n\n\n\n<p>Over recent years, the demand for funds for expansions coupled with high-interest rates, foreign exchange volatility, and the increasing volume of financial transactions have necessitated the <strong>requirement of efficient management<\/strong> of cash. Business firms face cash problems when there is a lack of synchronization between cash receipts and cash payments.<\/p>\n\n\n\n<p><strong>In determining the quantum of cash or liquidity required in a business organization, the below-mentioned needs form the basic foundation:<\/strong><\/p>\n\n\n\n<ul><li><strong>The transaction needs<\/strong>: In any business, cash\nfacilitates the meeting of the day-to-day expenditures and other payments of debt.\nFor instance, cash is needed to make purchases, pay expenses, taxes, salaries,\ndividends, etc. Usually, the inflows of cash from routine business operations\nshould be sufficient for the purpose of meeting these payments. However, at\ntimes, this cash inflow may be temporarily blocked. Thus, in those cases, it is\nonly the reserve cash balance that can enable the business firm to make its\npayments on a timely <a class=\"glossaryLink\"  aria-describedby=\"tt\"  data-cmtooltip=\"&lt;div class=glossaryItemTitle&gt;Basis&lt;\/div&gt;&lt;div class=glossaryItemBody&gt;In finance, the &amp;quot;basis&amp;quot; is a term with several applications, including representing the difference between the spot price and the future contract price of an asset, which is vital in investment(...)&lt;\/div&gt;\"  href=\"https:\/\/enterslice.com\/learning\/terms\/basis\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'>basis<\/a>.<\/li><\/ul>\n\n\n\n<ul><li><strong>Speculative needs<\/strong>: Another very important\nsegment that requires a considerate utilization of the company&rsquo;s cash balance\nis its speculative needs. Cash may be held by businesses in order to take quick\nadvantage of some profitable opportunities which may arise before the company\nover time. But, they may be lost for want of readily available cash or settlement.\nFor instance, the prices of raw materials may fall temporarily, and a business\nfirm may want to make acquisitions at such prices.<\/li><\/ul>\n\n\n\n<ul><li><strong>Precautionary needs<\/strong>: Proper cash planning is\nnecessary to meet the company&rsquo;s precautionary needs as well. Cash may need to\nbe held by business enterprises to act as a reservoir for providing safety\nagainst unanticipated events or contingencies. The cash maintained for meeting contingency\nneeds is unproductive, or it remains ideal. However, such cash may be invested in\nshort-term or low-risk marketable securities which are readily convertible into\ncash or can provide cash as and when necessary.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>What is Management of Cash?<\/strong><\/h2>\n\n\n\n<p>For any business organization, the <strong><a href=\"https:\/\/enterslice.com\/cash-flow-management\"><em>management of cash flows<\/em><\/a><\/strong> involves an efficient cash collection process and managing the payment of cash both inside the organization and to third parties. This can be achieved when there may be complete centralization within a group treasury, or the treasury may simply suggest subsidiaries and divisions on policy matters, namely, collection\/payment periods, discounts, etc.<\/p>\n\n\n\n<p>Management of cash also deals\nwith planning and sourcing the company&rsquo;s short, medium, and long-term cash\nneeds. It plays an important role in taking the decision on capital structure\nand forecasting future interest and foreign currency rates.<\/p>\n\n\n\n<p>The exercise of management of cash also encompasses overseeing surplus funds in an investment portfolio. The <strong><a href=\"https:\/\/enterslice.com\/learning\/how-to-begin-a-successful-investment-journey\/\">investment policy<\/a><\/strong> will consider future needs for liquid funds and acceptable levels of risk as contemplated by company policy. <\/p>\n\n\n\n<p><strong>Management of cash flows is one of the most important functions of the finance manager. It is concerned with tasks relating to the managing of:<\/strong><\/p>\n\n\n\n<ul><li>Cash\nflows into and out of the business firm<\/li><li>Cash\nflows within the business firm, and<\/li><li>Cash\nbalances held by the business firm at a certain point of time by financing\ndeficit cash or investing surplus cash<\/li><\/ul>\n\n\n\n<div class=\"read\"><p><b>Check Also:<\/b> <mark><a href=\"https:\/\/enterslice.com\/learning\/financing-activities-importance-of-financing-activities-for-business\/\" target=\"_blank\" rel=\"noopener noreferrer\">Financing Activities &amp; Importance of Financing Activities for Business<\/a><\/mark>.<\/p><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Objectives of Management of Cash\nFlows<\/strong><\/h2>\n\n\n\n<p>The scheme of cash management\nof a business organization creates a delicate balance between the twin\nobjectives of liquidity and costs. <strong>The\nmajor objectives of management of cash flows for a business entity include the\nfollowing:<\/strong><\/p>\n\n\n\n<ul><li>To\nprovide adequate cash to each of its business units<\/li><li>To\nensure that no funds are kept blocked in idle cash, and<\/li><li>To\nensure that the surplus cash in business (if any) is properly invested in order\nto maximize the returns for the organization<\/li><li>To\nfulfil its working capital requirements on a timely basis<\/li><li>To\nplan its capital expenditure decisions and ensure optimum utilization of\navailable funds<\/li><li>To\navoid the situation of insolvency<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Cash Planning and Cash Flow\nBudgeting<\/strong><\/h2>\n\n\n\n<p>Cash Planning is a technique\nof management of cash flows which aims to plan and control the usage of cash.\nIt seeks to protect the financial conditions of the business firm by generating\na projected cash flow statement. Such a projected cash statement is derived\nfrom a forecast of expected cash inflows and outflows for a particular period.\nThis process may be executed periodically either on a daily, weekly, or monthly\nbasis. The period and frequency of cash planning normally vary with the size of\nthe firm and the philosophy of management. As companies grow and business activities\nbecome complex, cash planning becomes inevitable to achieve enduring success.<\/p>\n\n\n\n<p>To estimate the requirement of cash, Cash Budget is one of the most significant tools to plan for and control cash receipts and disbursements. It represents the complete cash requirements of a business entity during a given budget period.<em> The main purposes served by a cash budget comprise the following:<\/em><\/p>\n\n\n\n<ul><li>It\nlocates the time periods where there might be either a shortage of cash or an exorbitantly\nlarge cash requirement. Thus, it co-ordinates the timings of cash needs.<\/li><li>Likewise, it also helps to pinpoint the time\nperiods where there is likely to be excess cash available.<\/li><li>It allows the business firm which has sufficient cash to take\nadvantages like cash discounts on its accounts payable.<\/li><li>It helps to plan or arrange adequately needed\nfunds (avoiding excess\/shortage\nof cash) on favourable terms.<\/li><li>It\nallows the firm to decide to invest surplus cash in marketable securities and\nearn profits therefrom.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\">Management of cash flows: Managing Cash Collection and Disbursements<\/h2>\n\n\n\n<p>Having prepared the cash budget, the finance manager of the business entity must then ensure that there is not a significant deviation between the projected cash flows and the actual <strong><a href=\"https:\/\/en.wikipedia.org\/wiki\/Cash_flow\"><em>cash flows<\/em><\/a><\/strong>. To realize this, the efficiency of cash management will have to be improved through exercising appropriate control of cash collection and disbursement. In fact, <strong>the twin objectives in managing the business cash flows should be to accelerate cash collections as much as possible and to decelerate or delay cash disbursements<\/strong>.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Accelerating Cash Collections<\/strong><\/h2>\n\n\n\n<p>A business enterprise can preserve\ncash and decrease its requirements for cash balances if it can speed up its\ncash collections. This can be done by issuing sales invoices quickly or by minimizing\nthe time lag between payment of the bill by a customer, the collection of cheque,\nand the availability of funds for the firm&rsquo;s use. <\/p>\n\n\n\n<p>Float refers to the time\nperiods which influence cash as it moves through the different stages of the\ncollection process. For instance, billing float is the time lag between the actual\nsale and the mailing of the invoice by the seller to the purchaser. Similarly, banking\nprocessing float is the time from the deposit of the cheque to the crediting of\nfunds in the sellers&rsquo; account. <strong>To speed\nup the cash collection process and to reduce float time, a business firm can\nuse a decentralized collection system called concentration banking and lock box\nsystem.<\/strong><\/p>\n\n\n\n<p><strong>Concentration\nBanking<\/strong>: The\nmethod of concentration banking is one of the important and most popular ways\nof reducing the size of the float. Here, <strong>the\nbusiness enterprise establishes a number of strategic collection centres in various\ndifferent regions rather than having a single collection centre at the head\noffice<\/strong>. With this kind of system in place, the period between the time a\ncustomer mails in his remittances and the time when they become spendable funds\nwith the selling entity gets reduced. Payments received by all collection\ncenters are deposited with their respective local banks, which in turn, are transferred\nto the concentration bank of the head office. The concentration bank, with\nwhich the entity has its major bank account of surplus funds, is normally\nsituated at the headquarters. <\/p>\n\n\n\n<p><strong>Lock\nBox System<\/strong>: Another\npopular means used by companies to accelerate the flow of funds is a lock box\nsystem. While under concentration banking, remittances are received by a\ncollection centre and deposited in the bank after processing, the lock box\nsystem strives to eliminate the time between the receipts of remittances by the\ncompany and the deposit in the bank.<\/p>\n\n\n\n<p>In this kind of arrangement,\nthe business enterprise rents the local post-office box and authorizes its bank\nat each of the locations to pick up remittances in the boxes on behalf of the\ncompany. The customers are also billed with proper instructions to mail their\nremittances to the lock boxes only. The bank then picks up the mail several\ntimes a day and deposits the cheques in the business entity&rsquo;s account. Such a process\nreleases the company from the burden of handling and depositing the cheques. <strong>In other words, the lag between the time\ncheques are received by the business entity and the time they are actually\ndeposited in the bank gets eliminated<\/strong>. However, the major drawback of the lock\nbox system is concerned with the cost of its operation. These lock box arrangements\nare generally not profitable if the average remittance is small for a company since\nthe cost is almost directly proportional to the number of cheques deposited.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Managing Cash Disbursements<\/strong><\/h2>\n\n\n\n<p>Akin to exercising efficient\nmanagement over cash collection processes, <strong>it\nis also important to have effective control over cash payments in order to\nachieve an overall faster turnover of cash.<\/strong> This is possible only by making\npayments by the company on the due date and making excessive usage of drafts or\nbills of exchange instead of cheques.<\/p>\n\n\n\n<p>The availability of cash in a\nbusiness concern can be maximized by playing the float. For example, a firm\naccurately predicts the time when the cheques issued by it to the suppliers\nwill be presented for encashment. With this, the firm utilizes the float period\nto its advantage by issuing more cheques but having in its bank account only so\nmuch bank balance as will be just sufficient to honour those cheques which are\nactually expected to be presented on a particular date.<\/p>\n\n\n\n<p>Moreover, the business\nenterprise may also make payments to its outstation suppliers by cheque and\nsend it through the mail. The delay in transit and collection of the cheque\nwill be used to increase the float.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Other Techniques for Management of Cash<\/h3>\n\n\n\n<p>Besides, accelerating\ncollection of accounts receivables and stretching of accounts payables, the\ncompany should also look for the ways of reducing its operating cost to maintain\na good cash flow in the business and improve its profitability. The enterprise\nshould try to extend the payment of dues to creditors or suppliers by acquiring\nan extended credit period from them.<\/p>\n\n\n\n<p>Furthermore, regular cash flow monitoring by keeping an eye on the cash inflows and outflows, prioritizing the expenses and reducing the debts to be recovered, makes the businesses&rsquo; financial\/liquidity position sound. The widely used banking services such as a business line of credit, cash deposits, lockbox account and sweep account must be incorporated into the business efficiently and intelligently. In addition, up-gradation with technology and digitization makes it convenient for the business organizations to maintain the financial database and spreadsheets to be assessed from anywhere anytime.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Optimum Cash balance <\/strong><\/h2>\n\n\n\n<p><strong>A business firm must make efforts to maintain an optimum cash balance to cater to its day-to-day operations<\/strong>. It may also carry on some additional cash as a buffer or safety stock. The amount of cash balance will be dependent upon the risk-return trade-off. The business should maintain an optimum level of cash balance, i.e. just enough to meet its requirements, i.e. neither too much nor too little cash balance. <\/p>\n\n\n\n<div class=\"read\"><p><b>Also, Read:<\/b> <mark><a href=\"https:\/\/enterslice.com\/learning\/cash-flow-forecasting-in-financial-model\/\" target=\"_blank\" rel=\"noopener noreferrer\">Cash Flow Forecasting in Financial Model<\/a><\/mark>.<\/p><\/div>\n","protected":false},"excerpt":{"rendered":"<p>All businesses, whether large and small, rely on inflows of cash emanating from sales, investments, loans, and other sources. These cash inflows are offset by cash outflows, or disbursements needed by the enterprise to fund its material inventories, payroll, capital expenditures, investments, and other operational expenses. Cash flows represent the lifeline of any business, and [&hellip;]<\/p>\n","protected":false},"author":30,"featured_media":31052,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[11],"tags":[2924],"acf":{"service_id":"219"},"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v14.6.1 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Management of Cash Flows: The lifeline of a Business Org. - Enterslice<\/title>\n<meta name=\"description\" content=\"Management of cash flows involves an efficient cash collection process and managing the payment of cash both inside the organization and to third parties.\" \/>\n<meta name=\"robots\" content=\"index, follow\" \/>\n<meta name=\"googlebot\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<meta name=\"bingbot\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/enterslice.com\/learning\/management-of-cash-flows-the-lifeline-of-business-organization\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Management of Cash Flows: The lifeline of a Business Org. - Enterslice\" \/>\n<meta property=\"og:description\" content=\"Management of cash flows involves an efficient cash collection process and managing the payment of cash both inside the organization and to third parties.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/enterslice.com\/learning\/management-of-cash-flows-the-lifeline-of-business-organization\/\" \/>\n<meta property=\"og:site_name\" content=\"Enterslice\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/enterslice\" \/>\n<meta property=\"article:published_time\" content=\"2020-04-20T09:30:06+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2022-09-13T05:44:38+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2020\/04\/Cash-Flow-Management-The-lifeline-of-a-business-organization.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"670\" \/>\n\t<meta property=\"og:image:height\" content=\"352\" \/>\n<meta name=\"twitter:card\" content=\"summary\" \/>\n<meta name=\"twitter:creator\" content=\"@enterslice\" \/>\n<meta name=\"twitter:site\" content=\"@enterslice\" \/>\n<!-- \/ Yoast SEO plugin. -->","authorName":"Ruchi Gandhi","authorImageUrl":"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2020\/01\/Ruchi-Gandhi.jpg","authorDescription":"A CA together with MBA (Fin) and M Com, she relishes taking interest in insightful writing in the domain of taxation and finance. She has gained experience as a full-time author and has also served an accounting role in industry.","postViews":506,"readingTime":7,"nextPost":{"id":31082,"slug":"provisions-for-valuation-by-registered-valuer-under-companies-act-sebi-and-ibc"},"prevPost":{"id":31061,"slug":"synopsis-of-new-tcs-provisions-introduced"},"featuredMediaUrl":"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2020\/04\/Cash-Flow-Management-The-lifeline-of-a-business-organization.jpg","postTerms":"CFO Service","_links":{"self":[{"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/posts\/31050"}],"collection":[{"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/users\/30"}],"replies":[{"embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/comments?post=31050"}],"version-history":[{"count":0,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/posts\/31050\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/media\/31052"}],"wp:attachment":[{"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/media?parent=31050"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/categories?post=31050"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/tags?post=31050"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}