How to manage your cash effectively?
Managing your cash flow is a delicate technique. Cash management includes all decisions, rules and procedures which make it possible to ensure the maintenance of the instantaneous financial balance of the company at the lowest cost. Its primary objective is to prevent the risk of insolvency. The second being the optimization of the financial result (end product – end charges).
Briefly, Finance de Demain presents in this article how to manage your cash flow effectively. Here we go!!!
Table of contents
Treasury in finance
Cash is the sum of liquid assets and cash available immediately to an organization. It represents short-term financial capacity, including cash on hand, current bank account balances, and investments that can be quickly mobilized. This concept goes beyond a simple "Bank account" because it plays a vital role in the financial health and sustainability of the company. Cash management requires a thorough understanding of financial flows and a clear vision of the short-term needs of the organization.
The cash structure consists of several distinct but interconnected elements. First and foremost are cash assets, which include cash physically present in the company and immediately available bank balances. In addition, there are investment securities, which constitute a reserve of easily mobilizable liquidity.
Bank overdrafts, although representing negative cash flow, are also an integral part of this structure. Partners' current accounts and various cash instruments such as Money market SICAVs complete this set.
Strategic importance in business management
The strategic importance of treasury cannot be underestimated in business management. It plays a crucial role in ensuring the daily functioning of the organization through the payment of current expenses, whether salaries, suppliers or various tax obligations. Beyond this operational function, it constitutes a real strategic lever by offering the capacity to seize investment opportunities and by serving as a shock absorber against economic uncertainties.
Daily cash management requires a methodical and rigorous approach. It involves constant monitoring of incoming and outgoing flows, precise anticipation of future needs and optimization of temporary surpluses. This management is based on specific tools such as forecast cash flow plans, monitoring dashboards and cash budgets. Operational management also requires close coordination with the company's various departments to anticipate needs and optimize flows.
The concept of net cash represents a key indicator of the financial health of the company. It is calculated by subtracting current liabilities from current assets, thus giving a clear picture of the real financial position in the short term. This analysis makes it possible to assess the company's ability to meet its immediate commitments and maintain its activity without resorting to costly external financing.
Impact on financial performance
The impact of cash flow on overall financial performance is multifaceted. Positive cash flow indicates good financial health and strengthens the confidence of economic partners. Conversely, negative cash flow can signal structural difficulties and compromise the company's ability to grow. Cash management directly influences profitability through the optimization of financial costs and the ability to negotiate with business partners.
Modern treasury management tools have evolved considerably with the advent of digital technology. Cash management solutions offered by banks, specialized treasury management software and electronic payment platforms now offer sophisticated means to optimize the management of financial flows. These tools provide a real-time view of the cash position and facilitate decision-making. quick decision.
What does cash flow management consist of? ?
How to manage your cash flow effectively? Managing cash flow means determining the balance of cash flows. That is to say, ensuring the balance between outgoing and incoming flowsToday's treasury function integrates dynamic risk management, partly induced by the increasing uncertainty of the markets, without which there can be no real control of financial policy.
The core of the treasury function is cash management in value date. Its objective is to reduce financial expenses or increase financial income depending on the situation of the company. The basic principle of cash management on value date called "zero cash rule".
It consists of avoiding positive, low-paid cash or debit balances leading to financial charges. Thus, for credit balances there is a opportunity cost. It is equal to the difference in rate between the investment that could have been negotiated and the basic remuneration of the account. For debit balances, there is a explicit cost.
It is equal to the difference in rates between the overdraft and less expensive financing. Flow management corresponds to the traditional vision of the treasury function. It focuses on the processing of cash receipts and disbursements. It is also interested in the movement of funds within a group or a company.
Thanks to the development of computer systems, it is often automated. Computer science provides companies with an indispensable tool to cash management. The automation of calculations provides speed, reliability and flexibility in establishing forecasts.
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The approach to effective cash management
La cash management represents a fundamental pillar in the functioning of any organization. It encompasses all the techniques and strategies aimed at optimizing the liquidity position of a company. Its importance is crucial because it ensures the sustainability of the company by guaranteeing its ability to honor its financial commitments while maximizing surplus returnsThis function involves constant monitoring of monetary flows, anticipation of needs and close coordination between the different departments of the company.
Effective cash management not only contributes to the financial health of the organization but also constitutes a competitive advantage by allowing it to seize investment and development opportunities that arise. It requires a thorough understanding of operating cycles and a mastery of the financial tools available.
In an increasingly economic environment more complex and volatile, cash management plays a strategic role by serving as a barometer of the financial health of the company and guiding managerial decisions.
Establishing a cash flow forecast
Accurate cash flow forecasting is the foundation of effective management. This step requires a detailed analysis of foreseeable incoming and outgoing financial flows. It begins with the exhaustive identification of all sources of income and expenditure : customer collections, supplier payments, salaries, social and tax charges, loan repayments, planned investments.
The construction of these forecasts is carried out at different time horizons: short term (daily and weekly monitoring), medium term (monthly forecasts) and long term (annual projections). The use of specialized computer tools facilitates the compilation and analysis of historical data to establish reliable projections.
These forecasts must be regularly updated based on achievements and new elements impacting cash flow. Particular attention must be paid to seasonal variations and exceptional events likely to significantly influence cash flows.
Optimization of cash flow
Optimizing collections is a major lever for improving cash flow. This approach involves implementing rigorous invoicing and collection processes. It begins with the rapid and accurate preparation of invoices upon delivery of goods or services.
Payment terms should be clearly stipulated and automated reminder systems set up for late payments. Adopting modern payment methods such as direct debit or online payment solutions can significantly speed up collections. Regular monitoring of customer deadlines (DSO - Days Sales Outstanding) helps identify areas for improvement.
Negotiating advantageous payment terms with strategic customers while preserving the business relationship requires a delicate balance. Financing solutions such as factoring can also be considered to accelerate cash inflows.
Strategic management of disbursements
Managing disbursements requires a strategic approach aimed at optimizing cash outflows without compromising relationships with business partners. This involves skillful negotiation of supplier payment terms while respecting legal limits, such as the LME law in France. Investment planning must be aligned with the company's financial capabilities and may require phasing.
The choice of payment methods must take into account transaction costs and processing times. Particular attention must be paid to the centralization of payments to optimize flow management. Establishing a precise schedule of major disbursements helps to avoid surprises and maintain an optimal cash balance. Establishing payment validation procedures ensures effective control of cash outflows.
Implementation of monitoring and control tools
Effective cash flow management requires the implementation of:tracking tools efficient and adapted to the size of the organization. Daily dashboards must present a clear view of bank positions and cash movements. Monitoring reports must include key indicators such as cash balance, deviations from forecasts, customer and supplier payment terms.
The use of specialized software makes it possible to automate the collection of banking data and the production of reports. These tools also facilitate the detection of anomalies and the management of alerts. A regular reporting system must be established to inform management of significant developments and potential risks. The implementation of internal control procedures ensures the reliability of information and the security of treasury operations.
Banking relationship management
Optimal management of banking relationships is a key element of the treasury strategy. It involves maintaining a regular and transparent dialogue with banking partners. The negotiation of banking conditions must cover all the services used: commissions on operations, interest rates, lines of credit, cash management solutions.
Diversification of banking relationships helps reduce the risks of dependency while benefiting from the best market conditions. The quality of the financial information provided to banks directly influences their perception of risk and therefore the conditions granted.
Regular meetings with account managers help maintain a relationship of trust and anticipate future financing needs. Active monitoring of new banking solutions helps to continually optimize cash management.
Conclusion and constant vigilance
Effective cash management requires constant vigilance and the ability to adapt to changes in the economic environment. It relies on the involvement of all stakeholders in the company and requires close coordination between financial, commercial and operational departments. The success of this management depends on the quality of forecasts, responsiveness to observed discrepancies and the relevance of the corrective actions implemented.
The increasing use of digital technologies offers new opportunities for optimization but requires regular updating of skills. In an uncertain economic context, cash flow management is becoming a major competitive advantage and a key factor in the sustainability of the company. A proactive and structured approach to cash flow management not only secures the present but also prepares for the future.
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