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Discuss the importance of effective cash management. How does a cash budget support good manageme...

Question

Discuss the importance of effective cash management. How does a cash budget support good manageme...

Discuss the importance of effective cash management. How does a cash budget support good management of cash?

Answers

For better understanding answer is in detail:

The largest goal of good cash management systems is to reduce or eliminate any surprises when meeting cash requirements. Good cash management influences the efficiency of operations and reduces overall cost of doing business

Cash management and cash flow are two of the scariest things for any business to control. Improper cash management can lead to excessive debt or even bankruptcy. Lack of cash management can potentially put small businesses out of business. because they do not have good cash management.

  • What is cash management?

“The corporate process of collecting, managing and (short-term) investing cash. A key component of ensuring a company’s financial stability and solvency. Frequently, corporate treasurers or a business manager is responsible for overall cash management.”

Without a cash management system or at least closely monitoring cash, a business can become non-solvent very quickly because they do not have available cash for regular or unforeseen expenses. Many small businesses struggle with cash management and positive cash flow because they are dependent on sales and timely payments. It is similar to the personal financial dilemma of living paycheck to paycheck, with nothing left over from week to week.

  • Why is cash management important to any business?

Because it allows businesses to be solvent enough to keep the company in business even during slow activity or economic downturns. If your business cannot meet its monthly obligations for operations and liabilities you are not solvent. This means that a downturn in the economy or any loss of sales could be devastating.

Businesses that have poor cash management can fall behind in debt and monthly operational expenses, making it extremely hard to recoup stability. Sometimes when things are very rough   lack of cash flow can prevent the processing of payroll. Employees will not work if they do not get paid. If your cash flow issues get to that point the business has little chance to recover.

  • Cash management benefits:

1. Allows adequate cash for purchases and other purposes.

2. Ability to meet cash flow.

3. Allows planning for capital expenditure.

4. Allows for financing at better terms.

5. Enables you to make special purchases and take advantage of business opportunities.

6. Facilitates invest.

Cash buyer support good management of cash:

A cash budget details a company's cash inflow and outflow during a specified budget period, such as a month, quarter or year. Its primary purpose is to provide the status of the company's cash position at any point of time. ... It also helps in analyzing budget-versus-actual variances in cash inflow and outflow.


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