Essay: Cash Flow Management
Cash flow management is one of the most important elements of financial management in any organisation whether large or small. According to Reider and Heyler (2002)
“Cash management focuses on making the asset transformation process of the business work smoothly…effective cash management is necessary due to a lack of synchronisation between incoming and outgoing cash flows” (p.16-17).
The cash flow management process is used to accomplish effectiveness and efficiency in collection and payment of cash during the operations of a business. The process of cash flow management entails maximising inflows and minimising outflows. The management of cash flows is made effective through speeding up cash collection and delaying cash payments which gives the company a significant amount of free cash which can be utilised in operations and investments.
The financial crisis which started in 2008 has made management of cash flows more important for businesses. Morris (2008) reported “In today’s climate of continuing uncertainty, reducing consumer demand and significantly reduced liquidity, management of cash flows has taken on a new and much greater importance” (p.9). This displays the increased importance of cash flow management in the wake of financial crisis. A liquidity crunch in the economy means lesser resources of cash are available to a company so it has to manage cash flows in a more efficient manner. Companies need to focus on cash management to be able to survive the adverse financial conditions of today.
There are various ways to manage cash flows which include speeding up cash collections from operating and financing activities and delaying cash payments in these areas. In poor economic conditions cash inflows are lessened and delayed as debtors and customers delay payments to the company and actions can be taken to improve cash flows by making future estimates on inflows and outflows on a regular basis. If the company estimates and forecasts cash inflows and outflows for regular intervals of time it can efficiently manage cash flows as cash requirements in operations would be clarified and the sources of cash will be identified. If the company expects a shortfall or excess of cash it can make early decisions to make arrangements for these scenarios (Burnham 2009).