Cash Management

Cash management or liquidity management referred to in the Business Administration a concept in financial management.

  • 2.6.1 benefits
  • 2.6.2 disadvantages

Subject matter and objectives of cash management

  • The term Cash Management refers to all measures of short-term cash in the company. It covers the full range of tasks and activities that are carried out to ensure liquidity and to achieve the highest level of transaction efficiency. Cash management goes beyond a pure financial management, since an active, goal-oriented management of liquidity is carried out with the aim of ensuring and maintaining the solvency of the company.
  • Cash management is settled as part of the financial management generally in the area of ​​Treasury. The implementation of cash management can be performed either directly from the parent company or a captive finance company in the country or abroad.
  • A further objective is to achieve a defined return on the resources used. This means maximizing the interest income for surplus and the minimization of transaction costs. Besides, it is necessary to pay attention to minimizing the risks associated with the cash management. As part of a risk management system guidelines for the use of credit institutions, financial instruments and markets should be defined.
  • Derived from the core task of liquidity management also it is the task of cash management to ensure optimal integration of bank accounts. A company, for example, which has several branches with their own bank accounts in the euro area needs to ensure optimum liquidity that the available liquidity is concentrated on these accounts in a central account and liquidity shortfalls are compensated on these accounts. Cash management makes use of most of the so-called Zero Balancing, a leveling out process to offer the banks.

The design of the cash management

Based on the international cash management are four key task areas of Cash Management:

Liquidity planning

The liquidity plan covers all payment inputs and outputs for a given period are recorded and netted in order that any surpluses or deficits to get an overview of the liquidity situation. To accurately determine the current ability to pay a daily liquidity status is created on the basis of account balances and data from financial accounting. In addition, there is a forward-looking liquidity planning, through the development of financial plans, which have a short-to medium-term planning period. The further this rich plans in the future, the lower their planning accuracy in the rule. The information gained through the planning then form the basis for all decisions and actions in the area of ​​cash management.

Disposition of cash

The central task of cash management is the management of cash. It includes measures to cover cash deficits and for the investment of excess liquidity. Cash management has both predictable schedule, and on non- predictable fluctuations in liquidity react appropriately. Liquidity shortfalls must be offset by short-term credit financing with a view to ensuring the willingness to pay. Scored liquidity surpluses are, however, interest-bearing to apply. The decisions about appropriate capital raising or investment of this has to be done on the basis of predetermined strategic framework in the field of finance.

Design of the cash flows

It is aimed at a least-cost transfer of payments. The aim is to reduce the cost of capital movements, such as bank charges or costs of internal processing. A frequently used as part of cash management tool to reduce these costs is the netting. Netting - or in the literature used interchangeably Group clearing - refers to the set-off of intercompany receivables and liabilities at a particular date. This can for example result from a unilateral or reciprocal delivery and services. After the number of consolidated companies can be further distinguish between bilateral and multilateral netting. In multinational corporations mostly takes the multilateral netting application because supply and service linkages between several Group companies are generally. The intra-group receivables and liabilities are recorded centrally and summarized after conversion into a base currency to an accounting matrix. This results in the net assets and liabilities of the Group companies, which are balanced on specified dates, through remittances.

Currency Risk Management

For cross -border activities of companies of different monetary and economic activity are observed. In particular, the exchange rate issue is relevant here, since exchange rate changes involve a number of economic risks, such as from the translation of balance sheets of foreign companies. Task of currency management in the context of cash management is to limit the exchange rate risks through appropriate hedging arrangements, such as part of a foreign exchange netting.

Example

Situational liquidity analysis

  • Monitor daily inflows and outflows
  • Opening inflow - outflow > = 0

Formation and dissolution of liquidity reserves

  • Form excess liquidity reserves →
  • Resolve Liquidity reserves →

Financing

  • Mobilize capital
  • Raising capital
  • Internal financing
  • External financing
  • Self-financing
  • Debt financing

Eg profit will be retained

Eg share issue

For example, make provisions

Eg loans, bonds

Structural liquidity

  • Long-term planning of investments Plan the follow-up costs
  • Plan of financing

Liquidity policy in the event of a crisis

  • What - happens - if scenarios
  • Prepare strategies Lowering of expenditure
  • Moving expenses
  • Bringing forward revenue (sale of assets)

Advantages and disadvantages of cash management

Benefits

  • Optimum utilization of cash
  • Bypass group external sponsors
  • Lower central liquidity reserve
  • Reduce banking -related costs
  • Cover currency risks
  • Economies of scale in financing
  • Transparency and flexibility
  • Uniform financial management
  • Specialization
  • Insolvency risks are reduced

Disadvantages

  • Costs of the central department
  • Dependency on the central liquidity supply
  • Risk of transferring risk
  • Focus on short-term profit
  • Administrative expenses ( bureaucratization )
  • Loss of autonomy
  • Decision distance
  • Transparency of financial relations towards third parties
  • Depending on the provider of the cash management system
Accounts receivable Capital (economics) Profit (economics)
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