Cash management: the complete guide

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What makes up a company’s cash?

Cash refers to the entirety of the liquid financial resources available to a company at any given time. The cash a company possesses forms a vital element of its financial management. In fact, it’s the free cash flow that allows a company to pay its expenses, including salaries, suppliers and more. In business, a company’s cash represents the funds that are available to it at any given time.

So, it comprises:

  • Liquid funds available in the till
  • Funds available in the company’s bank account(s)

These funds should be readily available to the company; it can then use them to cover planned or unplanned expenses or to finance projects when an opportunity arises, for example. It is this liquidity that makes it possible for the company to pay its expenses, such as salaries, suppliers and so on.

The cash balance takes into account all money that comes in and goes out and when calculated can show a surplus or a shortfall:

  • If the cash balance shows a surplus, it means that the company has money at its disposal – this is generally a good sign
  • If the cash balance shows a shortfall, it means that the company does not have any money at hand and will be unable to deal with certain situations without, for example, taking out a loan

Take care: analysing a cash balance is rarely this simple and the context needs to be taken into account for each particular company. For example, a cash balance may show a surplus because the company hasn’t paid its supplier invoices yet.

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Cash management – what is it?

Cash management brings together all of the methods and strategies for managing a company’s financial resources. It aims to ensure that the company’s structure is cost-effective by monitoring and analysing specific indicators.

Cash management can combine many tasks, including:

  • Tracking and cross-checking cash flow from one day to the next
  • Setting budgets and drawing up cash flow forecasts
  • Developing reports and tracking discrepancies between anticipated flows and actual flows
  • Managing relationships with banks
  • Optimising costs and financial products
  • Managing the various risks that may threaten cash flow
  • Financing investments
  • Allocating any cash surpluses
  • Any number of other tasks

Too many companies still only monitor their bank statements. However, this is not enough to anticipate potential cash holes or to identify investment opportunities. That is why it is vital to look at cash flow from a dynamic perspective, anticipate its development and know how to interpret it.

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What is cash management for?

Avoiding the risk of cessation of payments

A company that can no longer settle its short-term debts is a company that is in a situation of cessation of payments. This often means the company’s demise (or, at least, exposes the company to serious problems). Fortunately, managing your company’s cash can save you from finding yourself in a sticky situation. Setting up regular monitoring (by keeping a cash budget up to date, for example) will give you much better visibility of your current cash flows and your forecasts. This will allow you to identify in advance any cash gaps that could damage your finances and then take appropriate action.

Saving money (on overdraft fees, bank commissions and more)

Still not convinced? You should know that good cash management can save a company money on bank charges, such as interest on loans, overdraft fees, bank commissions and so on. For example, a company that uses its unauthorised overdraft will have to pay overdraft fees as well as the associated bank commissions.

If a managing director maintains an overview of their cash effectively, they will be able to determine when they will actually need to finance their cash flow and will have time to put less expensive financing in place.

Making money by allocating cash surpluses cleverly

While cash shortfalls lead to extra costs for a company, poorly placed cash surpluses can be just as problematic.

You should know that banks have wide product ranges for those with surplus cash to allocate, and these products can be aligned with the managing director’s objectives, such as:

  • Allocating the surplus with a view to long-term profit
  • Allocating the surplus with a view to financing an investment
  • Allocating the surplus with a view to having a safety net for unforeseen expenses

However, it is still important to actually know that the company has generated this surplus. And how can we shine a light on this? By using a cash flow plan and closely following its progress.

Cash management – who does what?

Cash management is relevant to every company, but workload and available staff vary from one company to the next. A multinational will have a much larger cash flow to manage than a start-up that’s just getting going, and a small company will have far fewer staff members trained to manage its cash flow than a corporate group.

The role of the managing director

The managing director of a company needs to know the company’s cash situation and measure the impact of their decisions on its profitability and future cash flow, whether these be investments, recruitment or anything else. Good cash management should allow the managing director to make the best decisions for their company, both in the short term and far into the future.

Don’t forget: if the company is small and doesn’t have a dedicated finance team, it’s the managing director that will fulfil all of the roles described below!

The role of the finance director

The finance director manages the company’s finance team and reports to the managing director. From a cash management perspective, their role is to monitor key indicators reliably and in real time so that they can make the managing director aware of any cash flow issues and advise on decisions to be taken and actions to implement.

The role of the treasurer

The treasurer manages the cash flow from one day to the next. They are responsible for monitoring cash flows, preparing forecasts, analysing a variety of key indicators, managing relationships with banks, organising validation and much more. Their role is essential because they have an overview of the company’s liquidity and profitability.

The role of the accountant

In general, accounting is said to be an analysis of past events, whereas a treasurer’s activities look at the future. If a company doesn’t have a treasurer, the accountant will be responsible for cash management. If there is a treasurer, they will instead be responsible for providing the required data, such as invoices, balance sheets, income statements and so on.

The role of the management accountant

The management accountant’s role in cash management is to take responsibility for the budgets for each of the company’s activities or services offered. They provide the information needed to draw up the cash flow forecast.

Day-to-day cash management

Analysing your cash flow once at the beginning of the month and returning to it 30 days later is not enough. You should get into the habit of monitoring your cash flow on a daily basis – cash inflow and outflow should be closely monitored, after all.

Bank reconciliation

Bank reconciliation is a monitoring process that lets you check that the invoices that your company has issued and received correspond to the same movements in your company’s accounting records.

Know your cash situation

The cash situation represents the cash available to your company at any given time. Often, the most practical way to check the cash situation is to use the free cash flow at the end of your company’s annual balance sheet. If cash flow monitoring is rigorous, however, it’s also possible to use a monthly cash balance, which is taken from the tracking table.

Monthly cash flow tracking table template

You can create a simple Excel spreadsheet to gain a helpful overview of your cash flow. We have come up with a template for you to download for free.

You don’t need to put any complicated information in the table:

  • First, enter your free cash flow at the beginning of the first month
  • Then, identify the cash inflow and cash outflow for that month, e.g. invoices, expenses, taxes, rent, grants and so on. Everything should be accounted for in a clear and easy-to-read way (and including tax). Check that all cash flows definitely relate to the month in question
  • The software will automatically calculate the cash available at the end of the month. All you have to do is draw the conclusions needed to make your business run smoothly!

This real-time data on the amount – and actual payment dates – of your invoices allows you to keep your cash flow up to date and anticipate any potential short-term cash flow interruptions.

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Manage your cash using a cash flow plan

Also known as a cash flow budget, the cash flow plan is a forecast that allows you to project cash flows in the short, medium and long term.

It’s a finance forecasting document that lists all of your company’s expected cash inflow and outflow. It generally looks at a 12-month period, so presents all of your company’s money flows expected in the course of its activity. This list must be exhaustive and include all transactions – no exceptions. Even the smallest omission will distort the balance at the end of the month and give a false indication of your company’s financial health.

Below is an example of a cash flow statement using a fictitious company’s cash flow plan for 2021. The cash inflow and outflow are clearly identified, and breaking the year down into columns gives you monthly overviews that are both concise and comprehensive.

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Cash management – how do you predict the future?

Draw up a cash flow forecast

If you don’t draw up a cash flow forecast, then you’re essentially playing it by ear. This is why establishing a projected cash flow plan is essential – it lets you monitor and adjust your company’s strategy at regular intervals. A projected cash flow plan gives a managing director information about upcoming cash flow problems, allowing them to anticipate these and take action as needed. However, using a cash flow plan as a forecast is not an end in itself. It should be regularly updated based on actual cash flows and changes in objectives.

Consider all scenarios

To ensure optimal cash management – especially from a forecasting perspective – your company must consider all possible scenarios. Whether it’s the loss of a client, payment delays or drops in demand, or conversely a sudden increase in orders or rapid growth, all possibilities must be considered and your response for every eventuality should be included (e.g. seeking external financing, major investment and so on). One of the main risks is when a company’s vision of its future is overly optimistic – especially young companies that are yet to find their feet in terms of cash flow. In particular, there is often confusion when it comes to high revenue and positive cash flow: having one does not necessarily mean you will have the other!

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Cash management – key performance indicators

Free cash flow

Free cash flow refers to the money that you have across all of your bank accounts and is available to you at any given time. Monitoring this indicator is vital, as is forecasting its development with a cash flow forecast. Being able to determine your projected cash flow with some accuracy will allow you to act in advance if necessary, and in doing so avoid an impromptu cash hole.

In order to keep your cash flow forecasts relevant, we also recommend regularly comparing your forecasts with what has actually been achieved.

Net consumption of cash

The net consumption of cash is calculated using the following formula: Net consumption for a given month = cash outflow for the month – cash inflow for the month. Using the data in your cash flow statement, you can track month by month if you are “consuming” cash (that is, if your outflow is greater than your inflow) or if you are accumulating cash. If you are consuming cash, there can be any number of causes, including exceptional causes (such as investments or a one-time drop in cash inflow) or structural causes (such as current expenses exceeding current income). In any case, you should be prudent and be sure not to let the situation persist indefinitely.

WCR and cash flow requirements

WCR stands for working capital requirement and refers to the amount of money a company needs to cover its cash flow gap between cash inflow and cash outflow (called the operating cycle).

Monitoring this indicator regularly will help you know how your company’s cash flow requirement is developing. Your WCR should be analysed because your company may experience an explosion in its level of activity but still face cash flow difficulties.

If you take a company that is experiencing a large increase in its business activity while allowing extended payment periods, this will generally increase the WCR, for example as a result of needing more stock, hiring to increase working capacity and purchasing additional machines.

Except that… Conserving this stock will have an impact on the cash flow as the goods have already been paid for but will only be sold at a later point in time. Therefore, the company must have sufficient working capital to finance all of this, pending the planned cash inflow that will restore balance.

Note: rising WCR does not necessarily mean your company will experience cash flow troubles. On the other hand, you must make sure that your company can definitely cope with the increased WCR.

Why is good cash management so difficult?

Many companies find cash management difficult. And for good reason – it’s a complex discipline.

Cash management – lots of factors to consider

Cash inflow, cash outflow, down payments, assets, credit, loans, payment periods – all of these factors make the cash management process more complex, especially if you track them manually using an Excel spreadsheet or paper documents! Accessing information can be complex too, especially if your company processes a large volume of cash flows across multiple bank accounts. This makes having a consolidated view of your cash flow nearly impossible.

Cash management – a job for your accountant?

A company’s managing director will naturally turn to their accountant for information on their company’s current and future cash flow situation. But cash flow and accounting are two different things! Your account will find it difficult to give you real-time information about your cash flow.

Cash management – a time-consuming task

Checking cash inflow and outflow from one day to the next, drawing up and updating cash flow forecasts, generating reports and interpreting indicators and much more. Cash management is a task that you have to invest time in every day.

Cash management – the limitations of Excel

Excel is a very powerful tool but it’s not very flexible or reliable and lacks real-time update functionalities. The more that humans are involved, the longer the processing time and the greater the risk of error – nobody is perfect, after all! And these errors will doubtless only be detected a few months later and will then take a long time to correct.

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The 5 best practices for improving your cash management

Since cash is the sinews of war, we have decided to provide a list of the key commandments for managing your cash in the best possible way!

1) Draw up financial projections

As the heading suggests, a cash flow plan serves a number of purposes, including allowing you to anticipate what’s to come. You will be able to spot potential cash flow issues quite easily, which will give you some more breathing space to implement appropriate corrective actions. But why settle for a single projection when you can create multiple scenarios for your company?

Nothing is stopping you from duplicating your forecast and creating different scenarios to get an idea of just how sound your cash flow is and what potential risks it entails in the different situations you have put together.

For example, this approach can also allow you to determine if you can afford to finance a major investment at a certain point in time or if you should wait a little longer until your cash balance is healthier. There’s a whole host of possibilities and the results are often very interesting.

2) Monitor your cash flow

Your company receives and pays out money every day, but the human brain cannot reliably record all of these cash flows. This is why setting up a cash flow monitoring process is critical. Using a dedicated tool will help you gain an immediate overview of your company’s short- and medium-term cash inflow and outflow.

Most importantly, however, don’t forget that cash management is not a one-off task and an out-of-date cash flow statement is of little use to anyone! The best thing to do is to set aside some time every week for adding to, correcting and updating your cash inflow and outflow.

3) Get paid on time

The client is king – after all, it’s the client that lets you keep your business running! Therefore, one of the challenges of cash management is maintaining a relationship of trust with your clients: the better you get on with them, the less likely you will be to experience payment delays, which are a true scourge to cash flow – we can’t emphasise this enough.

Be careful, though, as this doesn’t mean that you have to give in to everyone who buys from you. If you know that some clients tend to not pay on time, ask them to pay you in cash, telling them that you can’t afford to have too large a cash flow discrepancy. Likewise, don’t hesitate to inquire about your new clients in advance: if their bad reputation precedes them, be firm by telling them from the outset that you won’t give them any payment facilities.

4) Balance your inventory

Strike the right balance! The aim is to maintain your inventory at what you think is the optimal level for reducing the associated cash flow requirement. It’s all a matter of moderation: there are several inventory management methods to choose from. Some are better suited to companies selling in large quantities at regular intervals, while others work better for companies selling smaller quantities in a niche market.

5) Anticipate cash flow problems

Is your business thriving? Are your forecasts idyllic? Perfect! This is precisely the time to, for example, negotiate an agreed overdraft with your bank.

“But if everything is going well, why should I go and negotiate an overdraft?”

It is a fact that a company will be faced with cash problems or a cash shortfall and at least one financial recovery in its lifetime. Far from being dramatic, problems can generally be resolved quickly if plans are in place to mitigate them.

Consider our agreed overdraft example: By going to your bank while your finances are healthy, you won’t just enjoy financial benefits but you will also benefit automatically from an agreed overdraft, if your situation does get worse one day. However, if you tell the bank that you urgently need funding because you are two days away from being in the red, there is little chance that you will come away with anything at all. So, look ahead and remember that prevention is better than a cure!

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How can you make cash management easier?

For all of the reasons above, more and more companies are employing specialised cash flow software.

What is cash management software?

Cash management software is a solution that lets you manage your company’s cash flow electronically. The cash flow software helps to limit human error by collecting statements directly from your company’s bank accounts. It closely tracks invoice payments, compares projected and actual cash flows and even automatically generates cash flow monitoring reports.

Agicap – the software that simplifies your cash flow management

Revolutionising the way companies track and forecast cash flows, Agicap is THE cash flow management solution. Created in 2016 by three entrepreneurs from Lyon, Agicap makes cash flow management accessible to SMEs thanks to its online management and forecasting tool (SaaS).

Take a look at this testimonial from Merci Handy, a company that can easily manage its cash flow from one day to the next thanks to Agicap:

By applying artificial intelligence to relevant data, such as bank feeds, Agicap allows you to:

  • Easily visualise free cash flow in real time, using data that syncs automatically
  • Automate budget updates and cash flow forecasts, letting you see disparities and readjust future budgets as and when you need to
  • Make the best possible decisions by evaluating the impact of strategic scenarios on your cash flow

Agicap is a growing company that serves thousands of clients and has offices in France, Germany, Spain, Italy and the Netherlands.

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