Effective cash management is vital for financially constrained businesses. It guarantees timely fulfillment of financial obligations to employees, suppliers, and creditors. Therefore, implementing a robust cash planning procedure is a crucial step for finance directors or CFOs to guide their company to financial success.
Opposite sides of the cash management coin:
Depending on their circumstances, businesses find themselves on one of two sides of the cash management challenge.
1) Many businesses are cash-strapped, so the emphasis is on ensuring that funds are readily available to cover essential operational expenses. This can be particularly daunting for rapidly expanding businesses, as they require substantial working capital to sustain their growth trajectory. Any errors or setbacks in this regard can swiftly lead to significant financial and operational setbacks.
Maintaining cash reserves which can act as the safety net for a business will always be advantageous. They can also be a valuable resource to seize timely opportunities; having excess working capital may enable you to launch new products at the right moment or pursue acquisitions without delay.
2) On the flip side, having idle working capital has costs too. The cost of capital remains high, and having large amounts of idle cash sitting in your bank account can be interpreted as lax financial management by some stakeholders. As exemplified by the incidents involving SVB and Credit Suisse in 2023, this practice can also give rise to extra financial risks that require vigilant oversight and mitigation.
Cash Flows model - Critical for Business Continuity
Cash management is a critical concern for cash-strapped businesses. Good cash management ensures that you can maintain financial commitments to employees, suppliers, and creditors in the agreed time window. Consequently, instituting an effective cash planning procedure is among the essential actions that a finance director or CFO should initiate to steer their company toward financial prosperity.
A traditional 13-week cash flow model is often used as a starting point. This can forecast potential cash shortages, enable corrective measures, and foster coordination among the company and its various stakeholders.
Many finance teams also require short-term coordination, frequently in conjunction with payment processing. A two-week cash plan can ensure the company pays all required bills on time. This helps strengthen supplier relationships and ensures business operates without delays and disruptions.
Keeping cash in the right places
Even if cash shortage is not an issue, effective cash management remains crucial to ensure that funds are in the right accounts and currencies when needed. It involves striking a balance between safeguarding funds in secure locations, optimizing interest earnings, and ensuring easy and prompt access for essential payments. Hence, centralising cash management and having timely visibility about available funds can be important. Having controls in place to restrict fund access and payment instructions to authorized staff is also critical.
For medium-sized businesses in the UK that have branched out internationally, managing cash often isn’t just a matter of pounds and pennies. Dealing with multiple currencies can add intricacy to your cash management strategy. Keeping currency balances is not the same as having a hedging strategy and can often lead to unnecessary costs and FX losses. It is important to review and implement suitable solutions if your business manages significant amounts in multiple currencies.
Good cash management is important for both cash-rich and cash-strapped businesses. It can help your business operate smoothly and plays a critical part in avoiding unnecessary financial risks.
If you are looking to enhance your cash management and have questions about HedgeFlows, get in touch and we will be happy to help.