Cash Management

What is Cash Management in Accounting?

It is the process of optimum utilization of cash for ensuring liquidity and profitability and includes proper collection, investment, and disbursement of cash. Cash is the primary asset used by companies to settle their obligations on a regular basis.

Cash flow management is the mechanism of tracking the inflow and outflow of cash in the business. The Cash flow statementCash Flow StatementStatement of Cash flow is a statement in financial accounting which reports the details about the cash generated and the cash outflow of the company during a particular accounting period under consideration from the different activities i.e., operating activities, investing activities and financing more is the primary tool to ascertain cash flow management. It includes cash received and cash paid during business operations and for investing and financing activitiesFinancing ActivitiesThe various transactions that involve the movement of funds between the company and its investors, owners, or creditors in order to achieve long-term growth are referred to as financing activities. Such activities can be analyzed in the financial section of the company's cash flow more.

Cash Management Operations

Objectives of Cash Management

Examples of Cash Management

Example #1

A computer manufacturing company, Abc Limited, uses supplier Alpha & Co. to purchase raw materials. Alpha & Co. has the policy of allowing credit of 30-days. Abc limited has $10 million in cash resources available and has to pay $2 million to Alpha & Co. after the 30-day period. However, after the 30-day period, it has an investment opportunity of $10 million.

If the company can renegotiate its terms with suppliers allowing more period, the delay in payment will allow the company to use cash in the investment and then pay off the amount to Alpha & Co. at a later date from cash generated from other sources. Thus, by proper cash management, it can take investment opportunities as well as maintain business operations.

Example #2

A Company has 120 days of inventory and receivables are due in 60 days. The payable terms are 30 days. The company will face a cash crunch as the funds are blocked in debtors and inventory, and the payables are due in a lesser time span.

In order to manage the cash prudently, the company either should speed up the realization of inventory or debtors; or it should renegotiate the payment terms with creditors. If the company fails to do so, it would need to borrow funds to fill the deficit.

Example #3

Beta limited has the policy to pay off its creditors in 60 days and gives a credit period of 30 days to its customers. Also, it doesn’t hold an inventory of more than 10 days. How should the company manage cash flows?

Since the payment is made in 60 days and realization is made for debtors and inventory in 40 days, there is idle cash for 20 days. In order to optimally utilize the same, the company should find an opportunity to invest and maximize profitability.


The company should ensure the sufficiency of cash to meet the current obligations and also make sure that there is no underutilization of funds. It has to strike a balance between liquidity and profitability. Also, the businesses depend majorly on debtorsDebtorsA debtor is a person or entity that owes money to the other party in a transaction. The receiver is referred to as the creditor, and the payment terms vary for each transaction based on the terms and conditions agreed upon by the more, and if a debt turns bad, it can impact the cash flows. Therefore, they also help in determining enough provisions for contingencies.

The following are the major benefits –


  • It is very time consuming and requires specified skills.
  • It increases administrative and consultation charges for the experts hired to perform cash management.
  • Lack of resources and risk-taking ability of the company.


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This has been a guide to what is cash management and its definition. Here we discuss objectives of cash management in accounting along with examples and limitations. You can learn more about accounting from the following articles –

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