Cash plays an essential role in everyone’s everyday life. Even with credit cards, cash apps, digital payment apps, digital banking, and digital wallets, many of your clients still prefer to have a hefty amount of cash on hand or stashed in a bank account if they can manage it —
If they were asked:
which of these would they be able to answer quickly and accurately?
Most people can accurately state the amounts in their bank accounts at almost any time. It’s unlikely that your clients would know the exact dollar value of their investments like stocks, bonds, mutual funds, and real estate holdings.
In this article, InvestmentNews’ goRIA section tackles the importance of cash management. We also provide answers to questions like what cash management is, what the objectives are, related responsibilities, and more. And for your clients and any of your colleagues who you might think need to know why cash flow management is important, feel free to share this guide.
Cash management, aka treasury management, is the process of tracking and maintaining cash flow. It’s designed to ensure that a business has enough funds to cover their activities and financial obligations.
Cash management is vital for both individual clients and businesses. For individual clients, their objective in managing cash flows is to ensure their personal financial stability, as cash is considered part of their wealth portfolio. Businesses, on the other hand, need good cash flow management to maintain their financial stability and avoid insolvency.
To assist in cash management, accounting professionals have an indispensable tool for this: the cash flow statement. The cash flow statement is an essential element in the overall financial management of a business.
While cash flow statements are often reported to business stakeholders every quarter, some of its components are tracked and tackled daily and in real time. A cash flow statement is a comprehensive record of all a business’s cash flows, both inflows and outflows.
The cash flow statement enables financial reporting of the most cash-consuming day-to-day activities, which can include operations and operational costs, cash paid for investing, and cash from financing. The bottom line of the cash flow statement gives a more accurate picture of how much cash a business (or individual investor) has readily available.
The cash flow statement is often divided into three major parts and usually comprise the most common business activities. They are:
The operations section of the cash flow statement details sources of revenue from major business activities. This may be labeled as “cash flow from operating activities” or the CFO portion.
Cash flows from operating activities or business operations can include:
The cash flow from finance (CFF) activities section includes cash generated from investors and shareholders in a business. These and any other funds that are used to keep a business functional, and the cash movement between investors and the organization make up the CFF section of a cash flow statement.
For example, funds from a company's investors would fall under the financing section of the cash flow statement.
Also known as the Cash Flow from Investing or CFI, this part of the cash flow statement is mainly concerned with the investments made by the business. This section of the cash flow statement details cash that moves in and out of the business from the sale or purchase of various assets like land, new equipment, and securities investments. This can also include loans to suppliers or even revenue generated from company mergers or acquisitions.
The main challenge of cash management is its increasing complexity. When higher amounts of cash flow at a greater rate, the complexity of tracking and managing it and its transactions increases in proportion.
Business managers will surely find cash management daunting, especially when dealing with thousands of transactions at different times, different payment methods and at varying speeds. Situations like this can have a lot of different moving parts and a high margin for error.
For startups, cash management can be even more crucial, since the enterprise has yet to find its legs and make a profit. This video shows just how important cash flow management can be for businesses – from the startups to the entrenched industry leaders.
Another challenge is that businesses often lack real-time visibility when it comes to their cash flows. Nearly 6 out of 10 (58%) senior finance decision makers say it is difficult to get a complete view of their company using their current payment ops system.
This is why businesses need the most current picture of cash inflows and outflows from their accounts and know who is making a certain transaction. They need the proper tools that can take their bank statements and instantly match or reconcile them to customer payments. With tools like that, business managers can make informed decisions that will simplify money movement and make cash management easier.
Cash management can be a complex series of tasks, especially when dealing with large amounts of money and a huge volume of transactions, all completed at varying speeds and with different modes of payment. However, it is possible to sift through the complexities and pare down cash management to a few simple steps:
Step 1: Make forecasts of cash inflows and outflows and prepare the appropriate budget.
Step 2: Use different strategies to use funds efficiently, such as offering discounts to debtors who pay early.
Step 3: Negotiate with suppliers to get the best payment terms possible.
Step 4: Invest funds in short-term, low-risk instruments like government securities or money market funds.
Step 5: Track cash balances and review fund management plans regularly.
Financial advisors guiding their institutional or business clients is all well and good, but what of individual clients that handle large amounts of cash daily?
Cash can have a vital role in the day-to-day life of an individual client, so it would make sense for advisors to include their client’s cash balance when considering their overall financial picture. Logically, advisors should look at their clients’ cash position both in terms of their ability to achieve their goals and their sense of financial well-being.
Despite these simple facts, many financial advisors choose to spend virtually no time (if at all) advising their clients on what to do with their cash. And when the subject of personal cash management does come up, it is often a conversation about the perils of holding cash and the importance of not having too much cash on hand, for fear of it losing its value to inflation over time.
It also doesn’t help that most advisors only charge a percentage of AUM, which rarely includes cash.
While it was largely a low-interest-yielding environment after the 2008 crisis, recent developments have made interest rates rise significantly. For instance, in March of 2022, the Federal Reserve began increasing interest rates to curb high inflation that remained longer than policymakers’ expectations.
This came at a time when bank account balances increased sharply due to the pandemic, and many people across all income levels deposited their government stimulus packages. Recently, the Federal Reserve has stated that it plans to keep interest rates unchanged at present levels.
What this means is that your clients may see significant yields on their cash deposits, what with the Fed raising interest rates for the first time in years. Clients with more cash may reap the benefits of additional financial services such as cash management – something quite uncommon in the past.
Recently, large investment firms like BNY Mellon have turned to offering cash management services to leverage the increase in interest rates for short-term investment options.
Financial advisors could have an increasing opportunity to provide differentiating, value-added services by advising their individual clients on personal cash management.
The shortest path to effective cash management is to implement the appropriate strategies. There can be ways to improve a business’ cash flow management, but these will only work if they match the business’ financial strategy and goals. Here are some possible strategies you can advise your clients to adopt:
Goods production and inventory purchasing are just two examples of cash-intensive business processes.
A considerable amount of a business’ cash reserves can end up locked into inventory, especially if their inventory has several categories of products.
Businesses can make these processes more efficient by increasing the rate at which they purchase and sell inventory items. Cutting down on production time can help as well. This can be made more efficient by creating a thorough plan for the production cycle and finding ways to predict inventory sales more accurately.
It’s possible for businesses to use this cash flow strategy by putting off payments for less crucial accounts. This should be done carefully to avoid any penalties or damage to the company’s reputation.
A business that implements this well can sell their existing inventory and maintain enough cash for their account payables. Some suppliers offer discounts for prompt payments, so be sure your client does not delay payments for these accounts.
Yet another good way to practice efficient cash flow management is to collect accounts receivables as soon as possible. This can ensure a steady stream of available cash. Collecting debts asap can also make the credit period, credit terms, and collection policies more favorable to the business. Having these terms can help your client decide which suppliers deserve a credit line.
It’s possible for businesses to mix and match their financial strategies when the situation calls for it. Using a combination of the above strategies can provide optimum (if not maximum) monetary flexibility when applying cash flow management.
For instance, a business can minimize delays in paying various suppliers by keeping a constant balance in their cash flow statement. They can achieve this partly by purchasing inventory at discounts whenever possible and ensuring fast and efficient debt collection. The business can couple this strategy with keeping an up-to-date inventory record to avoid stock running out and make a backup plan in case of low cash reserves.
Cash flow management systems are software programs that automate some of the processes in cash management. Using these systems can speed up collection, payments, allow business managers to forecast working capital needs and ensure smooth business operations. As recently as a few years ago, more fintech startups have been churning out more products like cash flow management systems and apps.
Since data is made available in real time, cash management systems can monitor and manage revenue, expenses, and assets to maximize profits and run the business more efficiently.
Financial advisors and RIAs may find that providing cash management solutions can be a profitable addition to their financial services menu. In fact, many RIA advisors have begun offering banking services to clients since 2014 – mortgages, securities-based lending, and yes, even cash management.
While providing cash management services to business and institutional clients is not new, some RIAs and advisors may want to explore offering these services to individual clients. Several enterprising RIAs find that cash management can be effective in retaining clients, as well as attracting new ones.
Before offering these services to individuals, RIAs and advisors should do their due diligence and crunch the numbers. High net-worth clients with cash reserves in the hundreds of thousands or millions of dollars will need these services the most, and RIAs or advisors would also benefit from a fee-based agreement.
If cash management isn’t part of the services you offer yet, check out our Best in Wealth page to find out what the top firms are doing.
Executives from LPL Financial, Cresset Partners hired for key roles.
Geopolitical tension has been managed well by the markets.
December cut is still a possiblity.
Canada, China among nations to react to president-elect's comments.
For several years, Leech allegedly favored some clients in trade allocations, at the cost of others, amounting to $600 million, according to the Department of Justice.
Streamline your outreach with Aidentified's AI-driven solutions
This season’s market volatility: Positioning for rate relief, income growth and the AI rebound
