Cash Management refers to the process of collecting, managing, and optimizing the cash flows of a business. It involves ensuring that the company has enough liquidity to meet its short-term obligations, such as paying salaries, suppliers, and other operating expenses, while also making effective use of any surplus funds. Effective cash management helps a firm avoid insolvency, reduce idle cash, and improve profitability. However, several problems are associated with cash management, including unpredictable cash flows, delays in receivables collection, excessive idle cash, and a lack of coordination between departments which can lead to poor forecasting.
To deal with these issues, businesses use various tools for planning and controlling cash, such as cash flow statements (to track inflows and outflows), bank reconciliation statements (to identify timing differences and errors), and cash budgeting (to plan future cash needs). Companies also use techniques like accelerating receivables, delaying payments, and maintaining minimum cash balances to optimize cash levels. One of the most important tools is cash budgeting, which is a financial plan that estimates future cash receipts and payments over a specific period.
The methods of preparing a cash budget include:
1. Receipts and Payments Method – estimates all expected cash inflows (from sales, collections, interest, etc.) and outflows (payments to suppliers, wages, rent, etc.) during the budget period.
2. Adjusted Profit and Loss Method – starts with net profit and adjusts for non-cash and working capital items to forecast cash positions.
3. Balance Sheet Method – involves preparing projected balance sheets and comparing the changes in current assets and liabilities to determine cash requirements.
Example:
If a business expects monthly cash inflows of ₹5,00,000 and outflows of ₹4,20,000, the cash surplus will be ₹80,000. But if inflows are delayed or expenses unexpectedly rise to ₹5,20,000, the firm may face a shortfall, which highlights the importance of cash forecasting and maintaining buffer reserves. Thus, efficient cash management and budgeting help ensure liquidity, avoid overdrafts, and support smooth business operations.
