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Cash management is the monitoring and maintaining of cash flow to ensure that a business has enough funds to function. Investments, bill payments, and unexpected liabilities can affect a business’ inflows and outflows, and in turn their cash management. In order for companies to function autonomously, they need to establish a system that maximizes liquid assets while minimizing outgoing operational and logistical costs. In other words, cash management helps companies ensure that their cash flow covers their financial obligations.
Cash management depends on a company’s cash flow, or the money that goes in and out of a business. Cash flow refers to the money movement cycle through bank accounts. It depends on the clients that are paying your business for a service or a product and the expenses that you pay to keep your business running.
Why is cash management necessary?
A business with a working cash management structure collaborates with all of its internal stakeholders—usually financial officers, treasurers, or business managers. They strategize around the cash flow statement, which is a detailed record of all inbound and outbound transactions, as well as its cash used for investments. The main objective of the cash flow statement is to display the cash that is presently available for the business to use.
Every company, regardless of size, needs to have some level of a cash management capability, as it’s a critical component of financial security. Money is often moving in and out of a business account, but it’s crucial that more comes in so the balance isn’t depleted.
Say that there’s a food delivery company called CircleM. Juan uses CircleM to place a $100 food order, but his money doesn’t just go to CircleM. The money gets split across the restaurant that Juan ordered from, the driver delivering Juan’s food, and CircleM for additional service fees. When it comes to cash management, CircleM needs a real-time understanding of whether that $100—amongst countless other food orders—made it into each respective bank account.
If CircleM has a customer base of 100,000 users, its cash management system must operate at a much higher scale. Monitoring and tracking transactions at this level is considerably more difficult. In order to guarantee that money is flowing in and out of the right accounts, CircleM needs immediate insight into their cash flow so that they can see an accurate report of their company’s money movement—and act accordingly.
What are the challenges of cash management?
When money moves at a high volume and a high scale, the complexity of managing it increases. It can be daunting for businesses to have to track hundreds of thousands of payments, at various times, using different payment types that settle at different speeds. There are a lot of moving parts and considerable room for error.
Almost 6 in 10 (58%) of senior finance decision makers say it is hard to get a complete financial view of their company with their current payment ops system.
Businesses need real-time visibility. They want to ensure that they are getting the most up-to-date picture of how the cash is moving in and out of an account, as well as who is making a certain transaction. The proper tools will take their bank statements and instantly match or reconcile them to customer payments, simplifying money movement and making cash management easier.
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Explore the fundamentals behind back office finance processes and the accounting principles underlying them.
BAI2 files are a cash management reporting standard. They are widely accepted by banks across the United States for exchanging data regarding balances and transactions.
Bank reconciliation is the process of verifying the completeness of a transaction through matching a company’s balance sheet to their bank statement.
A banking API is software that facilitates a digital connection between a company and a bank.
The term "cash position" pertains to the quantity of cash or assets that can be readily converted to cash, held by an individual, company, or financial institution at any given moment.
Continuous accounting is the ongoing process of updating a business’s general ledger with reconciled bank statement transactions as soon as they become available.
The Flow of Funds is the movement of money in and out of bank accounts.
ISO 20022 files are a collection of XML-based schemas which standardize any type of financial message.
An invoicing API allows companies to create, send, manage, and reconcile invoices, as well as track related payments end to end.
An MT940 (Message Type 940) file is a detailed SWIFT statement that provides information about account transactions.
Month-end close is a critical process where the accounting team reviews and records financial transactions to close out the month.
The National Automated Clearing House Association (NACHA) is responsible for overseeing the Automated Clearing House (ACH) Network, which is used to send money electronically between banks throughout the United States.
NACHA files are the standardized file format that banks use to initiate and manage batches of ACH payments. These files help banks execute large volumes of ACH payments through The Clearing House (TCH) and Federal Reserve.
Payment operations is an umbrella term that refers to the entire lifecycle of money movement for a company.
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Recoupment refers to the recovery of spent or lost funds, especially in business operations.
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Two options for financial transaction settlement—differing in both speed and style—here, we’ll look at how both Net Settlement and Gross Settlement work in action.
Treasury Management Systems (TMS) are software applications that serve to help businesses simplify their payment operations by automatically tracking things like cash flow, assets, investments, and more.
Incoming payment details are notifications that a company is going to receive a payment it didn’t originate—meaning the receiving funds were not initially requested.
Payment controls help accounts payable (AP) departments avoid losing money due to fraud, late payment fees, and other errors. They are a necessary part of a company’s overall payment operations to keep payments secure, accurate, and authorized.
Account-to-Account (A2A) banking, sometimes also called Me-to-Me banking, is the transfer of funds from one account to another account.
Asset risk management is essentially a fusion of asset management and risk management.
Batch processing is a method of processing various types of transactions. As the name suggests, transactions are processed in a group or “batch.”
In business terms, float refers to the time delay between the movement of funds from one account to another.
Cash forecasting is a way for companies to look at “cash in” vs. “cash out” for a business over a window of time.
Cash management is the monitoring and maintaining of cash flow to ensure that a business has enough funds to function.
Cash pooling is a centralized cash management tool that companies with multiple subsidiaries sometimes use to optimize the cash balances of all legal entities.
Electronic check presentment (ECP) is the process of electronically submitting a check to a bank for payment.
IBAN, or an International Bank Account Number, makes it easier and faster for banks to process cross-border financial transactions.
Liquidity management provides visibility into cash positions over past, present, and future dates and provides an overview of the financial health of a business.
Treasury management is the act of managing a company’s daily cash flows and larger-scale decisions when it comes to finances.
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Identity Verification APIs allow businesses to streamline the process of checking the identities of new users by automatically, and in some cases instantly, verifying their provided identifying information.
The issuer identification number (IIN) is the first eight or nine digits on a payment card tied to the financial institution that issued the card.
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