**Cash Management**

The nightmare of cash management is a common struggle for businesses of all sizes, and it can cause significant financial harm if not managed properly. Cash management is the process of managing a company’s cash flows to optimize liquidity, minimize risk, and maximize returns. It involves managing the inflows and outflows of cash, monitoring cash balances, forecasting cash needs, and investing excess cash.

Proper cash management can help businesses avoid cash flow problems, reduce borrowing costs, and maximize profitability.

In this article, we will explore the best practices for managing cash flow, examples of successful cash management strategies, and the formulas and math involved in cash management.

**Download free Excel cash flow templates for:**

- Small business cash flow forecast and chart
- Cash flow statement: daily, monthly annual
- Business cash flow projection
- Cash flow forecast

**The Basics of Cash Management**

Cash management refers to the process of tracking, managing, and optimizing cash flows to ensure that a business has enough cash to meet its financial obligations. The primary goal of cash management is to maintain adequate liquidity, or the ability to pay bills and other expenses as they come due. To achieve this, businesses must:

**Forecast cash flows**

This involves estimating future cash inflows and outflows to determine the company’s cash position. A cash flow forecast can help businesses anticipate and prepare for cash shortages or surpluses.

**Monitor cash balances**

Businesses should track their cash balances regularly to ensure that they have enough cash on hand to cover their expenses. Monitoring cash balances can also help identify any discrepancies or fraudulent activity.

**Manage cash collections**

This involves collecting payments from customers promptly and efficiently to improve cash flow.

**Control cash disbursements**

Businesses should control their expenses carefully to avoid overspending and to ensure that bills are paid on time.

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## Steps on how to manage cash effectively

Managing cash effectively is essential for the financial health of any individual or organization. Here are the steps involved in cash management:

**1. Cash forecasting**

The first step in cash management is to forecast the company’s future cash flows. This involves analyzing historical data, market trends, and other factors that may affect cash flows. The cash forecast helps the company anticipate its cash needs and plan accordingly.

**2. Cash inflows management**

The next step is to manage cash inflows, which involves optimizing the timing and amount of cash received from sales, investments, loans, and other sources. This may involve implementing payment terms, managing accounts receivable, and negotiating payment terms with customers.

**3. Cash outflows management**

The third step is to manage cash outflows, which involves optimizing the timing and amount of cash paid out for expenses such as payroll, rent, taxes, and inventory. This may involve implementing payment terms, managing accounts payable, and negotiating payment terms with suppliers.

**4. Cash balance monitoring**

The fourth step is to monitor cash balances to ensure that the company has sufficient liquidity to meet its cash needs. This involves tracking cash inflows and outflows on a daily or weekly basis, monitoring bank balances and reconciling bank statements.

**5. Investment of excess cash**

The fifth step is to invest excess cash to generate returns. This may involve investing in short-term or long-term instruments such as certificates of deposit, treasury bills, or corporate bonds.

**6. Risk management**

The final step is to manage risks associated with cash management. This involves identifying and mitigating risks such as credit risk, interest rate risk, liquidity risk, and operational risk.

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**Excel examples**

You can find regular and another example Excel sheet with columns for each cash management step and a total for each, for both a good and worst-case scenario, as follows

**Regular example**

Date | Cash forecasting | Cash inflows management | Cash outflows management | Cash balance monitoring | Investment of excess cash | Risk management |
---|---|---|---|---|---|---|

01/01/2022 | $50,000 | $20,000 | $10,000 | $60,000 | $20,000 | Low |

02/01/2022 | $45,000 | $15,000 | $12,000 | $63,000 | $19,000 | Medium |

03/01/2022 | $55,000 | $18,000 | $8,000 | $73,000 | $21,000 | Low |

04/01/2022 | $60,000 | $25,000 | $15,000 | $73,000 | $22,000 | High |

05/01/2022 | $40,000 | $10,000 | $20,000 | $63,000 | $20,000 | Medium |

Total | $250,000 | $88,000 | $65,000 | $332,000 | $102,000 |

In this example, the columns for each step in cash management are filled out with values for each day, and the total for each column is shown at the bottom. This sheet could be used to track the company’s cash management over time and identify any areas for improvement.

**Good Case Scenario**

Date | Cash Forecasting | Cash Inflows Management | Cash Outflows Management | Cash Balance Monitoring | Investment of Excess Cash | Risk Management |
---|---|---|---|---|---|---|

01/01/2022 | $50,000 | $20,000 | $10,000 | $60,000 | $20,000 | Low |

02/01/2022 | $45,000 | $15,000 | $12,000 | $63,000 | $19,000 | Medium |

03/01/2022 | $55,000 | $18,000 | $8,000 | $73,000 | $21,000 | Low |

04/01/2022 | $60,000 | $25,000 | $15,000 | $73,000 | $22,000 | High |

05/01/2022 | $40,000 | $10,000 | $20,000 | $63,000 | $20,000 | Medium |

Total | $250,000 | $88,000 | $65,000 | $332,000 | $102,000 |

In this example, we can see that the company’s cash management activities differ significantly between the good and worst-case scenarios. In the good scenario, the company has much higher cash inflows and lower outflows, resulting in a higher cash balance and more opportunities for investment of excess cash.

**Worst Case Scenario**

ate | Cash Forecasting | Cash Inflows Management | Cash Outflows Management | Cash Balance Monitoring | Investment of Excess Cash | Risk Management |
---|---|---|---|---|---|---|

01/01/2022 | $30,000 | $10,000 | $20,000 | $20,000 | $5,000 | High |

02/01/2022 | $25,000 | $12,000 | $18,000 | $19,000 | $4,000 | High |

03/01/2022 | $20,000 | $8,000 | $15,000 | $12,000 | $3,000 | High |

04/01/2022 | $15,000 | $5,000 | $10,000 | $7,000 | $2,000 | High |

05/01/2022 | $10,000 | $3,000 | $8,000 | $2,000 | $1,000 | High |

Total | $100,000 | $38,000 | $71,000 | $60,000 | $15,000 |

In the worst-case scenario, cash inflows are much lower and outflows are much higher, resulting in a much lower cash balance and limited opportunities for investment. The risk management column also reflects the different risk levels between the two scenarios.

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**Examples of Successful Cash Management Strategies**

Many successful companies have developed effective cash management strategies. Here are a few examples:

Apple – Apple is known for its strong cash position, which is the result of its conservative approach to cash management. The company holds a significant portion of its cash in low-risk investments, such as Treasury bonds and commercial paper.

Walmart – Walmart uses a centralized cash management system that allows the company to track and manage its cash balances across all of its locations. This system enables the company to optimize its cash position and minimize the cost of borrowing.

Microsoft – Microsoft has implemented a cash conversion cycle strategy that involves managing its inventory, receivables, and payables to improve its cash flow. By optimizing its cash conversion cycle, Microsoft has been able to maintain a strong cash position and invest in growth opportunities.

**Formulas and Math Involved in Cash Management**

These formulas and calculations are important for businesses to understand and use in their cash management strategy, financial planning, and decision making.

Effective cash management involves using a variety of formulas and math concepts to calculate and analyze cash flows. Here are a few examples:

**Net Cash Flow**

This formula is used to calculate the net amount of cash inflows and outflows during a specific period. The formula is: Net Cash Flow = Cash Inflows – Cash Outflows.

For example, if the cash inflows for a month are $50,000 and the cash outflows are $40,000, the net cash flow would be $10,000.

**Gross Profit Margin**

This formula is used to calculate the profit earned on sales. The formula is: Gross Profit Margin = Gross Profit / Sales.

For example, if the gross profit for a month is $30,000 and the sales are $100,000, the gross profit margin would be 30%.

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**Operating Cash Flow**

This formula is used to calculate the cash generated or used by a business from its operating activities. The formula is: Operating Cash Flow = Net Income + Depreciation + Changes in Working Capital.

For example, if the net income for a year is $100,000, the depreciation is $20,000, and the change in working capital is $30,000, the operating cash flow would be $150,000.

For example, if a company has a net income of $100,000, non-cash expenses of $50,000, and changes in working capital of $20,000, the operating cash flow would be $130,000.

**Accounts Receivable Turnover**

This formula is used to calculate how many times a company collects its accounts receivable during a specific period. The formula is: Accounts Receivable Turnover = Net Credit Sales / Average Accounts Receivable.

For example, if the net credit sales for a month are $50,000 and the average accounts receivable are $10,000, the accounts receivable turnover would be 5 times.

**Current Ratio**

This formula is used to measure a company’s ability to pay its short-term liabilities. The formula is: Current Ratio = Current Assets / Current Liabilities.

For example, if a company has $100,000 in current assets and $50,000 in current liabilities, the current ratio would be 2.

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**Cash Conversion Cycle**

This formula is used to measure the time it takes for a company to convert its investments in inventory and other resources into cash flow. The formula is: Cash Conversion Cycle = Days Inventory Outstanding + Days Sales Outstanding – Days Payable Outstanding.

For example, if the days inventory outstanding is 50, the days sales outstanding is 30, and the days payable outstanding is 20, the cash conversion cycle would be 60 days.

For example, if a company has a days inventory outstanding of 40, days sales outstanding of 50, and days payable outstanding of 30, the cash conversion cycle would be 60.

**Return on Investment (ROI)**

This formula is used to measure the return on investment for a particular project or investment. The formula is: ROI = (Gain from Investment – Cost of Investment) / Cost of Investment.

For example, if a company invests $10,000 in a project and earns $12,000 from it, the ROI would be 20%.

##### Debt to Equity Ratio

This formula is used to measure a company’s leverage, or the amount of debt it has compared to its equity. The formula is: Debt-to-Equity Ratio = Total Liabilities / Shareholders’ Equity.

For example, if a company has $100,000 in total liabilities and $200,000 in shareholders’ equity, the debt-to-equity ratio would be 0.5.

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**Quick Ratio**

This formula is used to measure a company’s ability to meet its short-term financial obligations with its most liquid assets. The formula is: Quick Ratio = (Current Assets – Inventory – Prepaid Expenses) / Current Liabilities.

For example, if a company has current assets of $500,000, inventory of $100,000, prepaid expenses of $50,000, and current liabilities of $200,000, the quick ratio would be 1.75.

**Inventory Turnover**

This formula is used to measure how quickly a company is selling its inventory. The formula is: Inventory Turnover = Cost of Goods Sold / Average Inventory.

For example, if the cost of goods sold for a month is $50,000 and the average inventory is $10,000, the inventory turnover would be 5 times.

**Inventory Turnover Ratio**

This formula is used to measure how many times a company’s inventory is sold and replaced over a period of time.

The formula is: Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory. For example, if a company has $500,000 in cost of goods sold and an average inventory of $100,000, the inventory turnover ratio would be 5.

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**Working Capital**

This formula is used to measure a company’s short-term liquidity, or its ability to pay its short-term debts. The formula is: Working Capital = Current Assets – Current Liabilities.

For example, if a company has $200,000 in current assets and $100,000 in current liabilities, the working capital would be $100,000.

**Cash Ratio**

This formula is used to measure a company’s ability to pay off its short-term liabilities with its cash and cash equivalents. The formula is: Cash Ratio = Cash and Cash Equivalents / Current Liabilities.

For example, if a company has $50,000 in cash and cash equivalents and $100,000 in current liabilities, the cash ratio would be 0.5.

**Gross Profit Margin**

This formula is used to measure a company’s profitability by calculating the percentage of sales revenue that is left over after deducting the cost of goods sold. The formula is: Gross Profit Margin = (Revenue – Cost of Goods Sold) / Revenue x 100.

For example, if a company has $500,000 in revenue and $300,000 in cost of goods sold, the gross profit margin would be 40%.

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**Accounts Receivable Turnover**

This formula is used to measure how quickly a company is collecting payments from its customers. The formula is: Accounts Receivable Turnover = Revenue / Average Accounts Receivable.

For example, if a company has $1,000,000 in revenue and an average accounts receivable balance of $200,000, the accounts receivable turnover would be 5 times.

**Operating Cash Flow Ratio**

This formula is used to measure a company’s ability to generate cash from its operations. The formula is: Operating Cash Flow Ratio = Operating Cash Flow / Current Liabilities.

For example, if a company has $200,000 in operating cash flow and $100,000 in current liabilities, the operating cash flow ratio would be 2.

**Net Present Value**

This formula is used to calculate the present value of future cash flows by discounting them back to their present value. The formula is: Net Present Value = (Cash Inflows – Cash Outflows) / (1 + Discount Rate) ^ Number of Periods.

For example, if a project has expected cash inflows of $100,000 per year for 5 years, a discount rate of 10%, and a cash outflow of $50,000, the net present value would be $86,234.16.

**Break Even Analysis**

This formula is used to determine the level of sales needed to cover all expenses and break even. The formula is: Break-Even Point = Fixed Costs / (Price – Variable Costs per Unit).

For example, if a company has fixed costs of $50,000, sells a product for $100 with variable costs of $40 per unit, the break-even point would be 1,250 units.

**Excel Table Examples for Cah Management**

**Month-by-Month Cash Flow Analysis:**

Date | Transaction Type | Cash Inflow | Cash Outflow | Balance |
---|---|---|---|---|

01/01/2022 | Sales | $10,000 | $10,000 | |

01/10/2022 | Rent | $2,000 | $8,000 | |

01/15/2022 | Payroll | $5,000 | $3,000 | |

01/20/2022 | Equipment | $3,000 | $0 |

**Daily Cash Flow Analysis:**

Date | Transaction Type | Cash Inflow | Cash Outflow | Balance |
---|---|---|---|---|

02/01/2022 | Sales | $1,000 | $1,000 | |

02/01/2022 | Supplies | $200 | $800 | |

02/01/2022 | Payroll | $500 | $300 | |

02/02/2022 | Sales | $2,000 | $2,300 | |

02/02/2022 | Rent | $1,000 | $1,300 | |

02/03/2022 | Sales | $3,000 | $4,300 | |

02/03/2022 | Supplies | $500 | $3,800 | |

02/04/2022 | Sales | $1,500 | $5,300 | |

02/04/2022 | Equipment | $2,000 | $3,300 |

**Here’s an example Excel table for daily company cash management with daily and overall total:**

Date | Description | Category | Amount | Running Total | Daily Total |
---|---|---|---|---|---|

2023-03-01 | Sales | Income | 50000 | 50000 | 50000 |

2023-03-01 | Rent | Expenses | -5000 | 45000 | -5000 |

2023-03-02 | Purchases | Expenses | -20000 | 25000 | -20000 |

2023-03-02 | Utilities | Expenses | -1000 | 24000 | -1000 |

2023-03-03 | Payroll | Expenses | -15000 | 9000 | -15000 |

2023-03-03 | Office | Expenses | -5000 | 4000 | -5000 |

2023-03-04 | Sales | Income | 70000 | 74000 | 70000 |

2023-03-04 | Rent | Expenses | -5000 | 69000 | -5000 |

2023-03-05 | Purchases | Expenses | -30000 | 39000 | -30000 |

2023-03-05 | Payroll | Expenses | -15000 | 24000 | -15000 |

Total | 10000 |

In this table, we have columns for date, description, category, amount, running total, daily total, and total.

**Here’s an example Excel table for monthly company cash management with monthly and overall total:**

Month/Year | Description | Category | Amount | Running Total | Monthly Total |
---|---|---|---|---|---|

2023-03 | Sales | Income | 220000 | 220000 | 220000 |

2023-03 | Rent | Expenses | -20000 | 200000 | -20000 |

2023-03 | Purchases | Expenses | -70000 | 130000 | -70000 |

2023-03 | Utilities | Expenses | -4000 | 126000 | -4000 |

2023-03 | Payroll | Expenses | -55000 | 71000 | -55000 |

2023-03 | Office | Expenses | -20000 | 51000 | -20000 |

2023-04 | Sales | Income | 180000 | 231000 | 180000 |

2023-04 | Rent | Expenses | -20000 | 211000 | -20000 |

2023-04 | Purchases | Expenses | -80000 | 131000 | -80000 |

2023-04 | Utilities | Expenses | -5000 | 126000 | -5000 |

2023-04 | Payroll | Expenses | -60000 | 66000 | -60000 |

2023-04 | Office | Expenses | -25000 | 41000 | -25000 |

Total | 250000 |

In this table, we have columns for month/year, description, category, amount, running total, monthly total, and total.

The running total column shows the balance after each transaction. The monthly total column shows the total income and expenses for each month. The total row at the bottom shows the overall total income and expenses, as well as the monthly total for all months combined.

**Yearly Cash Flow Analysis:**

Date | Transaction Type | Cash Inflow | Cash Outflow | Balance |
---|---|---|---|---|

2021 | Starting Balance | $20,000 | $20,000 | |

2021 | Sales | $100,000 | $120,000 | |

2021 | Rent | $24,000 | $96,000 | |

2021 | Payroll | $60,000 | $36,000 | |

2021 | Equipment | $20,000 | $16,000 | |

2022 | Sales | $120,000 | $136,000 | |

2022 | Rent | $24,000 | $112,000 | |

2022 | Payroll | $70,000 | $42,000 | |

2022 | Supplies | $10,000 | $32,000 | |

2022 | Equipment | $15,000 | $17,000 |

**Here’s an example Excel table for yearly company cash management with total:**

Year | Description | Category | Amount | Running Total | Yearly Total |
---|---|---|---|---|---|

2023 | Sales | Income | 400000 | 400000 | 400000 |

2023 | Rent | Expenses | -40000 | 360000 | -40000 |

2023 | Purchases | Expenses | -150000 | 210000 | -150000 |

2023 | Utilities | Expenses | -9000 | 201000 | -9000 |

2023 | Payroll | Expenses | -115000 | 86000 | -115000 |

2023 | Office | Expenses | -45000 | 41000 | -45000 |

2024 | Sales | Income | 600000 | 641000 | 600000 |

2024 | Rent | Expenses | -50000 | 591000 | -50000 |

2024 | Purchases | Expenses | -250000 | 341000 | -250000 |

2024 | Utilities | Expenses | -12000 | 329000 | -12000 |

2024 | Payroll | Expenses | -150000 | 179000 | -150000 |

2024 | Office | Expenses | -60000 | 119000 | -60000 |

Total | 450000 |

In this table, we have columns for year, description, category, amount, running total, yearly total, and total.

The running total column shows the balance after each transaction. The yearly total column shows the total income and expenses for each year. The total row at the bottom shows the overall total income and expenses, as well as the yearly total for all years combined.

This table is useful for tracking yearly cash flow, ensuring that the company’s expenses are not exceeding its income, and calculating the overall total income and expenses for the period. It can also help with budgeting and forecasting for the future.

Details: Cash management involves managing a company’s cash flow, including the inflows and outflows of cash. The goal is to ensure that a company always has enough cash on hand to meet its financial obligations while minimizing the cost of holding excess cash. Effective cash management involves creating a cash flow forecast, monitoring cash inflows and outflows, optimizing cash conversion cycles, and implementing cash management strategies to maximize cash flow.

**Conclusion**

In conclusion, managing cash flow is a critical component of financial management for businesses. By implementing effective cash management strategies and utilizing formulas and math concepts, businesses can optimize their cash positions, improve liquidity, and avoid financial distress.

Photo credit: ds_30 via Pixabay

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