What is Cash Management?

Malcolm Tatum
Malcolm Tatum

Cash management is a broad term that covers a number of functions that help individuals and businesses process receipts and payments in an organized and efficient manner. Administering cash assets today often makes use of a number of automated support services offered by banks and other financial institutions. Services range from simple checkbook balancing to investing and using software that allows easy, automated cash collection. Proper management of company funds requires those in the finance department to be extremely literate regarding the different strategies and tools available. Technology is drastically changing how businesses manage their funds, streamlining processes.

Cash management includes balancing a checkbook.
Cash management includes balancing a checkbook.


Cash management is a set of strategies or techniques a company uses to collect, track and invest money. Although cash by definition refers only to paper or coin money, in cash management, companies usually also work with cash equivalents such as checks. This is becoming increasingly common as the money system becomes more abstract, using electronic methods.

Cash management includes collecting spare change in one convenient spot.
Cash management includes collecting spare change in one convenient spot.


In general, small businesses do not always have the ability to obtain the credit they might need. They have to rely more on their own money to meet expenses. Even in a large business, costs might come up that are not expected. Being unable to handle these situations puts a company at risk for loss of revenue or, in the worst case scenario, going out of business.

An armored car service is one service that companies may use for cash management.
An armored car service is one service that companies may use for cash management.

Cash management lets companies process and use their money in such a way that they have adequate funds available for regular costs like paying employees. It ensures that the company has some money for the things they did not plan on, such as a higher-than-expected increase in the cost of materials. The business also uses these techniques to check that people are paying as they should and that the funds are used for their original intent—that is, it prevents payment loss and heightens financial and overall operational accountability. These strategies influence cash flow, as well, making it more likely that the business will have the funds it needs at the right time.

Post office boxes may be used as a lockbox where all payments are made to the post office box, and the company's bank collects the funds to deposit.
Post office boxes may be used as a lockbox where all payments are made to the post office box, and the company's bank collects the funds to deposit.

Range of Services

Companies use a wide variety of techniques in cash management. One of the simplest is checkbook or account balancing, also known as reconciliation. Investing in stock and other securities is also part of financial management strategies for many businesses. Many organizations use software programs to automate how the business collects funds from clients. Agencies routinely use other methods such as Internet sevices, armored car services, automated clearing houses, controlled disbursement, lockboxes, positive pay and reverse positive pay, cash concentration and balance reporting.

Service Examples in Depth

Lockbox services are becoming fairly standard in cash management. This technique requires the business to set up a post office box to which the company’s bank has access. The business uses this post office address as the remittance address on all invoices. The company’s bank collects the payments from the post office box as they are received and posts them to the company’s operating account. The business typically can access and download daily reports related to the payments, which the company can use for posting payments into the company receivables.

The concept of account reconcilement services also has become a must for many companies due to the increased incidence of check fraud. An ARC’s goal is to keep the checkbook for an operating account balanced at all times. As an additional level of protection, the ARC allows the client to upload a daily listing of checks that have been issued on the account. In the event a check is presented that is not included on the authorized lists, the bank will reject the check.

Many banks offer the ability to transfer a fixed amount of money into mutual funds or other investments through automated debit. This allows the client to increase the value of the corporate investment portfolio incrementally without having to spend a great deal of time working through complicated investment strategies.

Financial Literacy

The wide range of cash management services and techniques available means that those who are in charge of a company’s money have to demonstrate a high level of financial literacy. They must be aware of the benefits and drawbacks for each option the company considers and how those options interact to form the business’ collective financial approach. New options become available over time, so financial workers routinely must reevaluate the techniques the company is using to see if they are still effective given the context of the market and the company’s objectives.

The Role of Technology

Technology has vastly changed how companies approach taking care of their money. An example is the automated clearing house, or ACH. Through these technological networks, a business can transact a business-to-business cash transfer that deducts the payment from the customer account and deposits the funds in the vendor account. Generally, this service is available for a fee at local banks.

Another good example of businesses using technology in cash management is the use of software to automate payroll or the routine purchase of materials or services such as electricity. Software also can be used for activities such as preparing budget reports, purchase orders and fiscal statements. Using software can be costly due to the need for updates and hardware, but most companies find that the savings gained from these tools more than justifies their cost.

Processing receipts is an important component of cash management.
Processing receipts is an important component of cash management.
Malcolm Tatum
Malcolm Tatum

After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including wiseGEEK, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.

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Discussion Comments


What are the goals of cash management for a business? Should those goals be the same for every kind of business? Why or why not?


In a nutshell and simple terms, cash management is nothing but efficient processing of receivable and payments, and also includes providing related MIS to business for strategy and planning cash.


nice summary of everything relevant to CM.


@Parmnparsley - By "planning investment and expenditures...", I mean try and plan any investments in your restaurant that affect your operational ability to times when the interruption will be minimal. Say for example, you are renovating your dining room. Plan this during the off season, and make sure the plans are in place before the renovations are done, so you can minimize the time that your doors are closed to the public. As for gift certificates, they always seem to give businesses fits. You can try adding expiration dates so you can have a concrete date as to when they are considered hard cash and not cash equivalents. If you have a POS system, you can also use it to create gift cards and manage them through your systems software.

Some of the more important steps to managing your internal controls would be:

1) Establish responsibilities among your employees

2) segregate duties so that similar duties are done by different people

3) Establish good documentation procedures

4) Use good physical controls (i.e. time clocks, safes, etc.)

5) Establish a system of independent internal verification that reviews, compares, and reconciles data.

Hope this was helpful


@Georgesplane - Great summary of cash management, but could you give me examples of some of the principles you mentioned? I own a restaurant and I would like to know what you mean by planning investments and expenditures to maximize operational efficiency. Also, one of the biggest problems I have with managing accounts receivables is dealing with gift certificates. How would you recommend managing them? One last inquiry, do you have any tips for a small business on internal management of accounting? I would like to increase the efficiency of my internal operations and minimize loss.


Basically there are five principles to cash management:

1) Invest your idle cash assets

2) Plan investments and expenditures to maximize operational efficiency

3) Hold accounts payables until the latest date without taking a penalty

4) Keep inventory levels as low as possible

5) Increase the speed of collection of accounts receivables

These principles outline the goals of cash management ultimately ensuring your cash works for you. Good cash management will increase operational efficiency, and can be the difference between success and failure in competitive industries. Maximizing cash can allow a company, both big and small, the resources needed to invest, or make it through tough economic times. Good cash management will also cause cash reserves to grow; increasing the liquidity of the company.

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