Cash is the most important aspect of operating a business. It is the basic input that keeps business running on a day to day basis. Therefore, it is necessary to manage cash effectively as a business’ operating environment is quite volatile.
Therefore, a firm with a sufficient amount of cash is highly liquid. It has the ability to meet all of its expenses. Whereas, an illiquid firm does not have enough cash. The insufficiency of cash can act as a drag on the business operations.
Furthermore, your business needs to maintains an optimal amount of cash balance. This is because inadequate cash can slow down production. Whereas excessive cash can turn out to be expensive as it hampers the earning potential of your business. Further, idle cash carries an implied cost for your business. This cost is called the opportunity cost. The opportunity cost is in the form of losing out on the interest income. Thus, you could have earned this interest income by either investing idle cash in interest bearing securities or by paying off loans.
This means that having inadequate or surplus cash indicates mismanagement of that your business funds. Therefore, you must lay emphasis on maintaining an optimum balance of cash. And such a cash balance needs to be maintained at the right place, at the right time and at the right cost.
So let’s understand the meaning of cash management before discussing how effective cash management can improve your business outcomes.