What Are the Best Practices in Corporate Cash Management?

A business can show healthy profit margins and revenue on paper, but still struggle to pay its bills. Cash flow problems are one of the reasons small businesses or startups fail within the first five years. It can stem from poor budgeting, lack of funding, and cash mismanagement. How do you ensure longevity and profitability for your business?

Establish a solid corporate cash management process tailored to your company’s needs. 

In this guide, we’ll explore why corporate cash management matters, how it differs from corporate cash collection, and the best practices to follow.

What Is Corporate Cash Management?

Corporate cash management covers the collection, monitoring, and control of a company’s cash flow. It tracks three critical movements: money coming in (receivable), cash going out (payable), and money in your accounts (liquidity). 

What’s the difference between cash collection and cash management? Cash collection refers to the process of receiving payments from customers. Cash management is a broader concept; it involves planning, monitoring, and optimizing all of your company’s cash and cash equivalents, including collections. 

Why Your Business Needs Corporate Cash Management

Cash management is a strategic process that does more than track money in your company. The ultimate goal is to ensure your business’s financial health. Without it, your business can struggle with more than just making payroll.

Here are reasons to build a corporate cash management process.

• Ensure Financial Stability: Financial stability builds resilience, ensuring your business continues to operate even during a downturn.
• Plan Strategically: Once you have a clear understanding of your cash position, you can make better decisions about hiring, investments, and expansion.
• Cut Costs: Smart cash management prevents unnecessary payments (e.g., overdraft fees, late payment penalties, etc.).

Best Practices in Corporate Cash Management

So how do you manage your cash flow, grow the business, and weather a downturn?

Follow these best practices in corporate cash management.

Estimate your future cash inflows and outflows. 

To understand your cash flow, cash flow forecasting is essential. Forecasting estimates your future cash inflows and outflows over a certain period, from weeks to months to a quarter. A good forecast gives you sufficient visibility to spot any financial problems early on, allowing you to take decisive action.

Include variables like customer payments and investment income for inflows, and payroll and supplier payments for outflows. Accurate forecasting requires a thorough understanding of your payment collections and patterns. When customers pay 60 days after receiving an invoice, incorporate that delay into your cash flow forecast.

Strategically manage your accounts payable.

Accounts payable management covers all the processes and strategies for handling the money your business owes to suppliers and creditors. Proper management of accounts payable ensures an improvement in your cash position while maintaining good relationships with suppliers or vendors.

Begin by reviewing your current processes and strategies. Are there areas for improvement? Which process has hampered payments? Do you need to negotiate new payment terms?

Once you have a clearer picture of your current accounts payable management, then you can implement changes to drive better results. This may involve using automation to streamline processes. The right software can eliminate the need for constant monitoring while ensuring invoices are accurate and payments are made on time.

Shorten the time between billing and payment.

The quicker you turn sales into cash, the healthier your cash flow will be. This means reducing the gap between issuing an invoice and receiving payment. Review your billing process: are invoices sent immediately after a service is delivered, or are there delays? Are invoice details accurate, clear, and easy for customers to understand?

Simplify payment methods by offering multiple digital payment options, including credit cards, bank transfers, and online payment gateways, so customers can pay through the method that is most convenient for them.

You can also offer incentives, such as discounts for early payments, or impose penalties for late payments.

Manage your liquidity.

Liquidity is your company’s ability to meet short-term financial obligations, including payroll, rent, and supplier payments, without stressing your cash reserves. Strong liquidity enables operations to continue running smoothly even during slower revenue periods.

Proper management of your liquidity requires having enough cash to meet your short-term obligations. Most businesses have three to six months’ worth of savings to cover expenses and serve as a safety cushion. Ideally, you’ll want to use any excess funds as an investment, like banking accounts that deliver high yields. The goal is not only to have enough cash to cover current expenses but also to use the excess cash to generate high returns.

Effective cash management doesn’t simply ensure your business will always have the funds in place to meet financial obligations. This strategic practice also boosts your bottom line by identifying cost savings and revenue opportunities. 

Manage your cash flow well. Secure the financial health of your company. And ensure the longevity of your business.