What is Cash Management?

Definition: Cash management is the efficient collection, disbursement, and investment of cash in an organization while maintaining the company’s liquidity. In other words, it is the way in which a particular organization manages its financial operations such as investing cash in different short-term projects, collection of revenues, payment of expenses, and liabilities while ensuring it has sufficient cash available for future use.

What Does Cash Management Mean?

What is the definition of cash management? In the real world, organizations have strict cash management controls to monitor its inflows and outflows while retaining a sufficient amount in order to take advantage of attractive investments or handle unforeseen liabilities. Efficient management of cash prevents loss of money due to theft or error in processing transactions. Numerous best practices are adopted to enhance management of company’s funds.

This involves shortening of cash collection periods, regular follow ups for collections, negotiation of favorable terms with suppliers allowing delay in payment periods, and preparation of cash flow forecasts. Businesses also use of technology to speed up cash collection process. They must do all of this while maintaining adequate amount of funds to meet daily operations.

Let’s take a look at an example.


A computer manufacturing company, Techno Ltd., uses supplier Beta & Co. to purchase its core materials. Beta & Co. has the policy of allowing its customers who buy on credit to pay within 30-days period.

At the moment Techno Ltd. has $20 million cash resources available and has to pay $5 million to Beta & Co. after 30-day period for the purchases. However, after 30-day period Techno Ltd. has an investment opportunity requiring use of the full $20 million cash resources.

If the company is able to renegotiate its terms with suppliers allowing 60-day period, the delay in payment will allow the company to benefit by using current funds for the investment and paying suppliers with cash generated next month from other projects. Thus, by properly managing its funds, Techno can take advantage of investment opportunities while maintaining its operations.

Summary Definition

Define Cash Management: Cash management means a company’s ability to allocate its funds efficiently in an effort to cover operating expenses, make investments, repay shareholders, and maintain adequate reserves.

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