Imagine you find a $10 bill in your jacket pocket, buy a $9.50 sandwich and drop the two quarters in your change jar. Congratulations — you’ve just practiced cash management. In business, the process is understandably a bit more complicated. Cash management describes how a business balances the cash coming in and the cash going out of the company to make sure there’s enough to meet its short-term debt obligations, invest in growth and maintain financial stability. This article explains the finer points of cash management, ways to monitor cash flow it and how to avoid the pitfalls.

What Is Cash Management?

Cash management is how a business manages the inflow and outflow of cash to maintain a healthy cash flow while meeting short-term debt obligations and reinvesting idle cash where it can be most beneficial — such as in a high-yield account or by acquiring more assets to grow the business. Although different businesses will have different needs — some may require more cash on hand, for example — every business needs to master how it manages its own expenses, collects payments from customers and maintains financial stability. Poor cash management is one of the top reasons why new businesses fail within five years of launch.

Key Takeaways

  • Cash management tracks and ensures a healthy flow of incoming and outgoing cash, incorporating the ability to invest for future business goals.
  • It’s possible for a business to be profitable and yet have a negative cash flow.
  • Effective cash management can improve a business’s ability to allocate its idle cash between keeping an appropriate amount on hand to pay its bills and making smarter investments.

Cash Management Explained

Cash management, also known as treasury management, has two main goals: to ensure that a business can pay its short-term financial obligations and to invest in business growth. The cash management process oversees the company’s finances as represented by the inflow and outflow of cash over a given period. This information is valuable for financial forecasts. Businesses derive cash from three main sources: from operating activities, investing activities and financing activities.

Importance of Cash

If you’ve heard it once, you’ve heard it a thousand times: Cash is king — and for good reason. It’s how a business pays for its daily expenses, such as paying its vendor bills, buying materials and supplies, making payroll and covering overhead costs, without having to take on debt that eventually must be paid back in cash. Cash is also necessary to fund business growth, such as investing in new infrastructure or expanding to a new market; to cover unexpected expenses, like equipment repair; to weather unexpected events, such as a sales-reducing supply-chain issue or economic downturn; and, for seasonal businesses, to bridge the gap between one peak period to another.

Importance of Cash Management

Effective cash management can help a business stay solvent even during slow periods, meet its everyday business needs, invest in ways to grow and maintain good credit for future financing needs.

Even small changes can make a big difference in a business’s cash management processes. For example, a business might prefer to pay its bills as soon as they come in. But if Bill A comes in on Monday and gets paid on Tuesday, even though it’s not due for 60 days, the business might not have enough cash left to pay Bill B when it comes in on Wednesday and is due in 15 days. Effective cash management would result in Bill A being scheduled for payment closer to the due date, freeing up cash for more urgent payments. However, even without Bill B, the cash due for Bill A could be put to other uses, from simply accruing 60 days of interest income to buying new equipment, before the bill was due.

In other words, cash management isn’t just about having enough money to pay the bills. It’s about not leaving too much cash in low-yield accounts or petty cash boxes either. A well-managed cash flow allows for timely investments that help a business flourish or keep it afloat during economic downturns.

The Cash Flow Statement

The cash flow statement documents a company’s cash inflow and outflow from operating, investing and financing activities over a specific period of time, such as monthly, quarterly or annually. One of three core financial statements — the other two are the income statement and the balance sheet — the cash flow statement speaks to the company’s liquidity and overall financial health. It’s also a key tool for cash flow forecasting.

  • Operating activities: Operating cash flow is the amount of money that changes hands as a result of a business’s core operational activities over a period of time. The goal is to be cash-positive — that is, more money is flowing into the business than out of it. Otherwise, the business may have no other choice but to borrow money to cover its liabilities.
  • Investing activities: These primarily comprise purchases and sales of long-term assets (capital expenses), other businesses (mergers and acquisitions) and marketable securities that focus on the business’s long-term health and growth. A negative cash flow doesn’t necessarily mean a company is struggling; it may be the result of a period of investment for expansion and actually signify a healthy company.
  • Financing activities: Cash flow from financing activities encompasses incoming cash from debt or equity and outgoing cash for dividends, debt payments and stock repurchasing. Keep in mind that a company could show net profits, but if it’s primarily funding itself through debt, cash issues could arise, especially if interest rates rise and debt becomes more expensive.

Business Cash Flow Controls

The greater a business’s control over its cash flow, the healthier its cash flow is likely to be. On the accounts receivable (AR) side, the goal is to keep days sales outstanding (DSO) — the average number of days it takes to receive payments from customers — as low as possible. To help achieve that, an AR process in which invoices are generated and sent out promptly and, optimally, automatically is critical. The ability to provide a variety of convenient digital payment options can also cut down DSO. Incentivizing customers with discounts for early payments is another control option, as is proactively issuing reminder notes as payments near their due dates (another step ripe for automation). In addition, a control as basic as analyzing a customer’s creditworthiness before extending credit can help businesses protect themselves.

Accounts payable (AP) has a role in cash flow, too. Strategically prioritizing accounts and timing payments accordingly go a long way toward ensuring that companies’ cash outflow doesn’t exceed inflow. This also helps them take advantage of early-payment discounts. Automating the AP process can lead to cost savings, as well.

Some important cash flow indicators for businesses looking to more effectively manage their cash are:

Working Capital

Working capital is the amount of cash (or cash equivalents) a company has above its short-term liabilities; it is used to meet short-term obligations. It’s calculated by subtracting current liabilities, such as wages and accounts payable, from current assets, such as cash and accounts receivable. Positive working capital means the company has enough liquidity to cover its liabilities and invest in growth opportunities. Negative working capital may signal the need to improve or better control cash management, such as by incentivizing customers to pay ahead of invoice terms or by selling inventory, especially older goods, at a lower price to achieve quick sales.

Another way to improve working capital is to delay paying certain vendor invoices but doing so judiciously, because late payments can accrue fees and damage customer relationships. Sage advice: Communicate with the owed parties before choosing this option. Taking out a short-term working capital loan or business credit line can also help cover temporary shortages in working capital.


Cash flow ratios are a type of financial metric that provides important insight into a company’s performance, solvency, liquidity and overall viability. Working capital, for example, can be expressed as a ratio, also called the current ratio. It measures liquidity and is calculated by dividing current assets by current liabilities. A ratio below 1 is a red flag that cash flow issues exist; a ratio above 2 bodes well for short-term liquidity but may signify too much idle cash that could be used more effectively, such as by paying down debt or investing in assets.

Operating cash flow ratio is another important measure, reflecting the number of times a company can pay off its current debts with cash generated within the same period. Operating cash flow ratio is calculated by dividing operating cash flow by current liabilities. A number greater than 1 indicates that the company has more cash in a period than it needs to pay off current liabilities; the opposite holds true when the number is below 1. Certain businesses — for example, a grocery store with a quick turnaround between inventory stocking and payment — may be better equipped to manage a lower ratio.

Some other common ratios used to measure the health of a business’s cash management are:

  • Cash flow margin, a profitability ratio that shows how efficiently a company converts sales to cash. It’s calculated by dividing operating cash flow by sales.
  • Price to cash flow, a valuation ratio for public companies that measures the amount of operating cash flow generated per share of stock. It’s calculated by dividing share price by operating cash flow per share.
  • Cash flow to net income, which measures a business’s ability to generate cash from its operations. It’s calculated by dividing operating cash by net income.

Reasons for Poor Cash Management

There’s no one-size-fits-all reason for poor cash management, as every business’s cash flow is unique. The manual, error-prone recording of cash inflow and outflow is one common problem. Just one mistake, like a pair of transposed numbers, can lead a business to believe it has more or less cash than it actually does. Error resolution and the sheer time it takes to gather needed data also affects a business’s ability to issue timely cash flow forecasts and reports. This is why many modern businesses have turned to automated software for cash management.

Some other reasons businesses may struggle with poor cash management include:

They don’t understand the cash flow cycle.

A business with a negative cash flow can continue to operate for only so long, which explains why understanding how the cash flow cycle works and how to manage it accordingly is crucial. The business may achieve record-breaking sales, but if it’s unable to collect payments in a timely manner (or at all), it can easily run out of cash. DSO is one way to monitor how long, on average, it takes a company to receive cash payments from customers.

On the cash outflow side of the equation, a business will theoretically have more cash on hand to invest in growth when it pays its own bills closer to their due dates. However, it’s rarely that cut-and-dried, especially as a business grows and transacts on a daily basis. It can also save more in the long run by taking advantage of early-payment discounts. That said, a practical approach would be for the business to create a payment schedule that spreads out when its expenses are paid, thereby putting less strain on its coffers all at once. Payment method is another consideration. If paying by check, for example, the business won’t know exactly when the check is received, deposited or cleared. That means the dollar amount won’t leave the business’s account for days or even weeks after the check was written — time during which the business could have put the money to better use.

They have a poor understanding of profit versus cash.

Just because a company records a profit doesn’t mean its cash flow is in good shape. Cash is money that enters and exits a business from operating, investing and financing activities over a given time period. When more money is coming in than going out, the company has a positive cash flow and is able to meet its daily expenses. The opposite holds true with a negative cash flow. The company’s cash position is recorded on its cash flow statement. Profit is how much revenue remains after the company deducts its operating expenses. Based on the accrual method of accounting, profit recognizes revenue when it’s earned and expenses when they’re incurred during a specific time period. This information is accounted for in the company’s income, or profit and loss, statement.

The timing differences between when cash and profit are factored in can be a big swing. For example, a company that sells a high percentage of goods on credit will show a positive profit, which reflects sales when they are made — but until customers pay their invoices, the business could simultaneously have a negative cash flow.

They lack cash management skills.

Businesses that lack cash management skills could be in for some hard lessons. By studying their cash flows, they can more accurately forecast their cash needs for the future and prevent overextending their resources, launching too many products or opening new locations. If they sell on credit, restocking inventory that has yet to be paid for can put a strain on cash flow that can be challenging to overcome. Effective cash management improves operations for both incoming and outgoing cash by properly tracking and balancing accounts payables and receivable.

Another cash management skill is based on trusted business relationships that can lead to more favorable or extended payment terms. For example, a supplier or financial institution may be more willing to extend a business’s payment deadline or alter financing terms if the latter has a solid track record. Offering to make an early payment to a longtime business associate is another way to forge strong ties.

They made bad capital investments.

Long-term growth is often the goal behind investment in capital assets, like physical property or equipment. But for myriad reasons, investments don’t always work out as planned. A bad capital investment not only fails to pay for itself but, if financed, will continue to cost a company money until the loan is satisfied. Of course, not all has to be lost. For example, a business could lease or sell property and resell extra equipment it had intended to use to generate cash.

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Automate Cash Management With NetSuite Cash 360

NetSuite Cash 360 is a dashboard-driven tool that helps businesses monitor and manage their cash position and liquidity with real-time visibility into how much money is flowing into and out of the company at any given moment. It also leads to better-informed cash flow forecasts and process improvements, including automating previously manual tasks. A part of NetSuite ERP, Cash 360 leverages transactional and historical data to better predict upcoming cash flows and help ensure there is adequate cash on hand to meet financial objectives.

Cash management is a necessity for business stability and growth. Without proper cash management, a business is taking its chances that it will have the liquid funds to pay its expenses, restock inventory and meet payroll. But there’s more to good cash management than just scraping by: Without sufficient working capital — a key cash flow indicator — it will be tough for the business to invest in new projects, assets and continued growth. Proper cash management can be more easily achieved by automating operations to speed cash flow in both directions.

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Cash Management FAQs

What’s the difference between cash management and treasury management?

Cash management and treasury management are often used interchangeably. However, some financial professionals use “treasury management” to describe a higher corporate level of a business, including more information on funding, deficit spending and investments. Cash management, on the other hand, looks at the cash coming in and out of a business, typically over a shorter period.

What is an example of cash management?

Anytime a business chooses when and where to spend money, it is practicing cash management. Say, for example, a business has a large vendor bill coming up but also needs to invest in some new factory equipment before a busy season. It decides to reach out to the vendor and arranges for an extended payment plan so it will have more cash on hand in the short term. At the same time, the company’s accounts receivable team offers a few customers an early-payment discount with the goal of getting them to pay more quickly. These are two ways the company is managing its cash flow.

What are the types of cash management?

Businesses receive and spend cash in many ways, so cash management can take many forms. Common types of cash transactions that need managing include operating cash flows, interest generation, tax bills/refunds, loan payments, asset acquisition/sales, payroll and utilities.

What are cash management activities?

Common activities to improve cash management include speeding up accounts receivable and spreading out accounts payable through technology and automation. Other tactics include measuring ROI on capital investments, keeping enough cash on hand to cover short-term liabilities and reinvesting surplus cash into high-yield accounts or investments.

What are the basic principles of cash management?

The basic principles of cash management include a comprehensive understanding of cash flow, choosing assets and investments wisely and tracking their returns. Efficient accounts receivable and accounts payable processes are also important.