Cash Management what it is and characteristics

In today’s business environment, cash management is a fundamental pillar for the sustainability and growth of any entity. In both small companies and large corporations, the correct management of liquid resources determines, to a large extent, the solvency and operational capacity of the organisation.

1. What is cash management?

Cash management, known internationally as “Cash Management“, is an essential financial discipline in business that deals with the administration and optimisation of an organisation’s cash flows and liquidity. Its relevance lies in the need to ensure that companies have the necessary resources available at the right time to meet their obligations and take advantage of investment opportunities, all without incurring unnecessary costs.

Cash management is not a static practice; it requires constant adaptation to market conditions, the economic situation and the particularities of each company. Effective cash management can be the difference between sustained growth and financial difficulties, making it one of the most critical functions in business.

2. Characteristics of cash management

Cash management is a key financial discipline in business that focuses on the management and optimisation of an organisation’ s cash flows and liquidity. The main characteristics of cash management are detailed below.

2.1 Full visibility

In the context of Cash Management, “Total Visibility” refers to the ability to have a clear, complete and real-time understanding of all cash flows and liquidity positions of an organisation at any given point in time.

This visibility is essential for several reasons:

• Informed Decision Making: With accurate knowledge of current balances, projected inflows and outflows, and liquidity positions, financial managers can make more informed decisions about investments, funding, and other critical operations.
• Liquidity Optimisation: By having a clear view of all available resources, companies can ensure that cash surpluses are properly invested and that sufficient liquidity is available to cover immediate obligations.
• Rapid Identification of Deviations: Full visibility allows companies to quickly detect any discrepancies or deviations in cash flows, which can indicate problems such as fraud, transaction errors or operational inefficiencies.
• Risk Management: The ability to monitor cash flows in real time allows companies to anticipate and mitigate potential financial risks, from liquidity shortfalls to currency exposures in international operations.
• Operational Efficiency: With a clear view of all cash flows, companies can streamline processes, reduce redundancies and eliminate inefficiencies in cash management.

To achieve this total visibility, many companies turn to advanced technology systems and tools that allow them to consolidate information from multiple accounts, banks and geographies. These solutions can offer dashboards, real-time reporting and automated alerts, providing financial managers with the information they need to manage cash effectively.

2.2 Liquidity Optimisation

Liquidity Optimisation in the context of Cash Management refers to the set of strategies and practices aimed at ensuring that an organisation has the necessary cash available to meet its short-term financial obligations, while maximising the return on its liquid assets.

In simpler terms, liquidity optimisation seeks to make the best possible use of a company’s cash and cash equivalents. This involves two main dimensions:

• Availability: ensuring that the company has sufficient cash or readily convertible liquid assets to meet its financial commitments, such as payments to suppliers, salaries, short-term debts, among others.
• Profitability: Ensuring that any surplus cash, which is not immediately required for operations or commitments, is invested in a way that generates a return for the company, but always considering the balance between profitability and risk.

Typical actions involved in liquidity optimisation include:

• Cash Flow Analysis: Projecting and monitoring future cash flows to identify potential liquidity shortfalls or surpluses.
• Active Account Management: Centralising or consolidating balances from multiple accounts, which may include techniques such as sweeping (where excess balances from one account are swept into a central account or investment) or pooling (combining balances from different accounts to manage them as a whole).
• Short-TermInvestments: Investing temporary surpluses in safe and liquid financial instruments that provide a return, such as money market accounts, certificates of deposit or commercial paper.
• Access to Lines of Credit: Establish agreements with financial institutions to access funding in case of unforeseen liquidity needs.
• Improved Collection and Payment Cycles: Accelerate collections and efficiently manage payments to improve the liquidity position.

Optimising liquidity is essential for any organisation, as it ensures its ability to operate without disruption and take advantage of investment or growth opportunities, while maintaining a healthy financial position.

2.3 Income and expenditure control

Income and Expenditure Control” refers to the management, monitoring and regulation of all inflows (receipts) and outflows (disbursements) of money in an organisation or financial institution. It is a critical activity within financial management, as it provides a clear view of cash flow and therefore the financial health and liquidity of the entity.

The following is a breakdown of the key aspects of this control:

• Detailed Recording: Documenting every transaction, whether an inflow or an outflow, accurately and in a timely manner. This allows for a complete history of all financial transactions.
• Projections: Based on historical data and business strategy, projections of expected cash flows are developed to anticipate liquidity needs or surpluses.
• Regular Review: A periodic review of records ensures that errors, deviations or irregularities are identified and corrected.
• Compliance with Obligations: Ensure that expenditures, such as payments to suppliers, salaries and other financial obligations, are made on time to avoid interest, penalties or reputational damage.
• Revenue Optimisation: Seek strategies to accelerate collections or increase revenue, which may include negotiating more favourable terms with clients or diversifying revenue sources.
• Expense Monitoring: Monitor and control expenses to ensure that they are aligned with the organisation’s budget and strategy. This also involves identifying and eliminating unnecessary or excessive spending.
• Tools and Systems: Use technology tools and financial systems to automate and simplify the control process, allowing for real-time tracking and more detailed reporting.

Effective monitoring of income and expenditure not only helps to maintain a healthy financial position, but also provides organisations with a clear view of their financial performance, facilitating evidence-based strategic decision-making. It is essential to ensure the long-term sustainability and growth of any entity.

2.4 Automation

Automation in Cash Management” refers to the implementation of technologies, systems and tools that enable the management, monitoring and control of an organisation’s cash flows and financial operations without requiring continuous manual intervention or with minimal intervention. Its purpose is to increase the efficiency, accuracy and security of cash management operations.

Within Cash Management, automation can manifest itself in a number of areas:

• Electronic Transactions: Enables the automatic execution of payments and collections through digital platforms, eliminating the need for manual processes or paperwork.
• Automated Bank Reconciliation: Systems can automatically reconcile companytransactions and balances with bank statements, identifying discrepancies or irregularities in real time.
• Sweeping and Pooling Systems: These tools automatically consolidate funds from different accounts, either by transferring surpluses to a centralised account (“sweeping”) or by pooling balances for joint management (“pooling”).
• Projections and Alerts: Modern systems can generate cash flow projections based on historical data and recognised patterns. In addition, they can be configured to send alerts in case of low balances, unusual transactions or any other situation that requires attention.
• Integration with other systems: Automation in Cash Management often integrates with other business systems, such as ERPs or accounting systems, to ensure a consistent and real-time flow of information.
• Security and Control: Automated solutions often incorporate advanced security measures such as multi-factor authentication, encryption and authorisation protocols to protect against fraud and errors.
• Reporting: The ability to generate detailed and customised financial reports automatically, enabling financial managers to gain quick insights and make informed decisions.
• Process Optimisation: Through automation, inefficiencies, redundancies or unnecessary manual tasks in the cash management process can be identified and eliminated.

The adoption of automation tools in cash management not only allows companies to manage their cash more efficiently, but also reduces the risk of human error, improves financial visibility and enables a more agile response to changing market conditions.

2.5 Risk Reduction

Cash Management Risk Reduction refers to the strategies and practices implemented to minimise or mitigate adverse financial exposures associated with an organisation’s cash management and banking operations. These risks can range from fraud to fluctuations in interest rates or foreign exchange rates. Proper management of these risks is essential to maintain a company’s financial stability and protect its assets.

Within Cash Management, risk mitigation can address several aspects:

• Fraud Risk: Implementing strict controls, multi-factor authentication and authorisation procedures to prevent fraudulent activities such as cheque forgery, electronic fraud or embezzlement.
• Liquidity Risk: Ensuring that the company always has sufficient cash available to meet its financial obligations. This is achieved through cash flow projections, standby lines of credit and efficient management of accounts receivable and payable.
• Foreign Exchange Risk: In companies operating in multiple currencies, fluctuations in exchange rates can affect the value of cash and investments. The use of hedging instruments, such as forward contracts, can help mitigate this risk.
• Interest Rate Risk: Changes in interest rates may affect the cost of debt or the return on investments. As with exchange rate risk, hedging instruments are available to manage this risk.
• Operational Risk: Refers to risks associated with failures in internal processes, systems or controls. Automation, training and regular reviews can help minimise these risks.
• Concentration risk: Occurs when a large proportion of liquid assets or transactions are concentrated in a single bank or financial institution. Diversifying banking relationships and spreading assets can help reduce this risk.
• Counterparty risk: Ensuring that the financial institutions or banks with which you do business are of proven solvency and reputation, minimising the risk of default by these institutions.

Risk reduction in Cash Management not only protects the company’s financial assets, but also ensures a smoother and more predictable operation, facilitating financial planning and strategic decision making.

2.6 Proactive Management

Proactive Management” in Cash Management means addressing an organisation’s liquidity needs, risks, opportunities and cash flow challenges in advance. Rather than simply reacting to financial problems as they arise, companies with a proactive approach to cash management seek to anticipate and prepare for variations in liquidity and other financial issues.

Within the context of Cash Management, proactive management can manifest itself in a number of ways:

• Cash Flow Projections: Conducting regular cash flow projections to anticipate surpluses or shortfalls and plan accordingly.
• Early Risk Identification: Detecting potential risks, such as exchange rate fluctuations, interest rate changes or changes in customer payment behaviour, and taking measures to mitigate them before they materialise.
• Optimising Temporary Investments: By anticipating cash surpluses, companies can plan short-term investments that maximise returns without compromising liquidity.
• Proactive Negotiation with Banks: Negotiate terms, rates and fees with banking institutions based on future needs and projections, rather than simply accepting standard terms.
• Active Relationship Management: Establish regular communication with customers and suppliers to anticipate changes in payment or collection patterns and adapt financial strategies accordingly.
• Early Adoption of Technologies: Keeping up to date with the latest Cash Management solutions and tools to ensure efficient management and take advantage of technological opportunities.
• Regular Reviews and Audits: Rather than waiting for problems to arise, conduct regular reviews and audits of Cash Management processes and systems to identify areas for improvement or correction.

In short, “Proactive Management” in Cash Management is about anticipation and preparation. By adopting a proactive approach, companies can improve their financial position, optimise the use of resources, minimise risks and seize opportunities in a timely manner, ensuring long-term sustainable financial health.

2.7 Temporary Investments

Temporary Investments in the context of Cash Management refer to the placement of surplus cash in short-term financial instruments or investment vehicles with the objective of earning a return or profit for a specified, usually short, period of time before those funds are required for future operations or commitments. These investments are typically low risk and highly liquid, allowing companies to access these funds when they are needed.

Key characteristics of temporary investments include:

• Liquidity: They can be quickly converted into cash without significant loss of value.
• Low Risk: These investments typically have a very low risk of capital loss.
• Short Term: They are made with the expectation that they will be converted to cash in a relatively short period of time, usually a year or less.

Some common examples of temporary investments in Cash Management are:

• Certificates of Deposit (CDs): These are time deposits offered by banks with a guaranteed interest rate.
• Commercial Paper: Short-term debt issued by companies with high credit ratings.
• Money Market Accounts: Deposit accounts that generally offer higher interest rates than traditional savings accounts.
• Treasury bills: Short-term debt securities issued by the government.
• Money Market Funds: Investment funds that invest in money market instruments, such as commercial paper or treasury bills.

The proper management of temporary investments is crucial in cash management, as it allows companies to maximise returns on their cash surpluses while maintaining the liquidity needed to cover future commitments. When evaluating and selecting temporary investment opportunities, companies should consider factors such as expected return, time horizon, associated risk and future liquidity needs.

2.8 Cash Pooling

Cash Management Fund Centralisation, often referred to as pooling, is a technique used by companies, especially those with multiple subsidiaries or operating units, to collectively consolidate and manage their cash balances. By pooling funds, companies seek to optimise liquidity management, reduce banking costs and maximise the return on temporary investments.

Centralising funds enables organisations to:

• Gain a Global View: It provides a consolidated view of cash and banking positions across the organisation, facilitating informed decision making.
• Optimise Liquidity: By consolidating balances, debit balances in one account can be offset against credit balances in another, reducing the need for external borrowing or the possibility of idle funds.
• Reduce Costs: Minimises costs associated with maintaining multiple accounts and reduces interest expenses by reducing unnecessary borrowing.
• Maximise Returns: Consolidated balances often allow for short-term investments in larger amounts, which can generate more attractive returns.
• Simplify Processes: Facilitate administrative and operational processes by managing fewer accounts and transactions.

There are two main approaches to pooling funds:

• Physical Pooling: Involves the actual transfer of funds from subsidiary accounts to a central (main) account. The subsidiaries then normally operate with a zero balance or a pre-defined target balance, and all surpluses or deficits are transferred to or from the main account.
• Notional Pooling (or Notional Clearing): Does not require the actual transfer of funds between accounts. Instead, the balances of several accounts are aggregated “on paper” to calculate the interest paid or received. Each account maintains its individual balance, but interest is calculated as if all funds were in a central account.

The choice between physical and notional pooling depends on a number of factors, including banking and tax regulations in the countries where the company operates, as well as the company’s specific liquidity and management needs.

It is essential for companies adopting a pooling strategy to be aware of local regulations and tax implications to ensure that their implementation is legal and efficient.

2.9 Strategic Banking Relationships

Strategic Banking Relationships in the context of Cash Management refer to building and maintaining long-term and beneficial relationships between a company and its partner banks or financial institutions. These relationships are not only focused on typical banking transactions and services, but are also geared towards a deeper and more strategic collaboration to support the company’s financial and operational objectives.

Strategic banking relationships in cash management involve several key aspects:

• Mutual Understanding: It is critical that the bank understands the company’s business model, industry and strategic objectives, and vice versa. This facilitates more aligned and customised banking solutions.
• Access to Advanced Services: A strong banking relationship can offer companies access to advanced services and solutions, from innovative payment systems to financial analysis tools and merger and acquisition advice.
• Favourable Terms: Companies with strong banking relationships can negotiate better terms in terms of interest rates, fees, credit limits and other financial aspects.
• Flexibility in Times of Crisis: In difficult situations, such as economic challenges or a liquidity crisis, a bank with which you have a strategic relationship may be more flexible and willing to offer temporary solutions or adjustments.
• Fluid Communication: Maintaining open and regular lines of communication with the bank allows companies to be informed about new opportunities, regulatory changes or market trends.
• Technology Integration: Close collaboration can facilitate the integration of systems and platforms between the company and the bank, which can result in more efficient processes and better visibility of financial operations.
• Strategic Advice: Banks, given their position at the centre of the financial system and their exposure to various industries, often have valuable insights and can act as strategic advisors to companies on financial and market issues.

To establish and maintain strategic banking relationships, companies need to be proactive, transparent and view their banks as partners rather than mere service providers. In turn, banks must be responsive, innovative and willing to adapt to the changing needs of their corporate customers. These relationships, when managed well, can be a significant source of competitive advantage and financial stability for companies.

2.10 Flexibility

Flexibility” in Cash Management refers to the ability of an organisation to adapt and respond efficiently to variations, unforeseen events or changes in its cash flow and financial operations. In the dynamic and constantly changing business environment, flexibility is essential to manage liquidity, seize opportunities, meet challenges and minimise risks.

In the context of Cash Management, flexibility implies:

• Adaptability to Fluctuations: Businesses must be prepared to deal with both unexpected cash surpluses and shortfalls. Flexible cash management allows companies to react quickly, either by investing surpluses temporarily or by accessing credit lines in case of shortfalls.
• Use of Multiple Financial Instruments: Flexible businesses do not rely exclusively on a single financial tool or instrument. They use a combination of tools, such as money market accounts, credit lines, factoring, among others, to manage their liquidity.
• Access to Diverse Sources of Funding: An organisation should not rely exclusively on a single source of funding. Having multiple banking relationships or access to different capital markets can provide additional options in times of need.
• Ability to Adjust Policies and Procedures: Companies should be able to review and adjust their cash management policies based on changing market or business environment conditions.
• Technology Integration: Use technology systems and tools that enable rapid adaptation to change, provide real-time reporting and facilitate process automation.
• Regulatory Change Preparedness: In many sectors and regions, financial and banking regulations can change. Flexible cash management means being informed and prepared to adapt to new regulatory requirements.
• Responding to Market Opportunities and Challenges: Whether it is an emerging investment opportunity or an unexpected economic challenge, flexibility allows companies to make quick and informed decisions.

Rigid and static cash management can lead to missed opportunities, higher costs and financial risks. On the other hand, a cash management strategy that prioritises flexibility ensures that the organisation can successfully navigate a complex and constantly evolving financial landscape.

Efficient cash management is critical to the financial health of any business. While many organisations struggle to maintain adequate control over their cash flows, innovative tools such as Tickelia have revolutionised the way businesses manage their expenses.

With the proliferation of mobile technology, solutions that allow expense management at your fingertips have become essential. Tickelia is a clear example of this evolution. This tool allows employees to report any expense instantly from their mobile devices. A simple photograph of the receipt or invoice is enough to record the expense. In addition, thanks to OCR ICR technology, the platform is able to digitise and extract up to 18 relevant fields of the expense, even from handwritten tickets.

The solution also automates a number of essential financial tasks, such as settlement, posting and payment card reconciliation, significantly reducing the time and manual effort traditionally required for these operations. With the ability to differentiate between payments made via payroll and bank transfers, Tickelia provides a clear and structured view of the company’s finances.

In the complex world of cash management, tools like Tickelia emerge as indispensable allies. They offer not only efficiency and accuracy, but also security and flexibility. By adopting advanced technological solutions, companies not only improve their financial management, but also prepare themselves to face the future challenges of an ever-changing business world.