Cash management forms the crux of any business, irrespective of the scale on which it operates. A business cannot run without analyzing the amount of cash flowing in and flowing out. Managing cash is as important as planning for long-term investments and marketing strategies, or perhaps even more. Failing to manage cash effectively shall result in the company jeopardizing its future. The company can neither plan their investments nor maintain stability. Therefore, it is essential that organizations come up with the right means of managing their cash flow.
More often than not, it is internal treasurers, outsourced treasury management services, or CFOs who handle a company’s task of cash management. Many people outsource, however there are a number of tools and products on the market available for treasurers and CFOs to use in-house. Companies have started relying on digital tools to manage their cash flow and have been quite successful at that. Because there is a massive range of tools and products, this can also lead to confusion regarding the ones that shall serve as the best option for cash management.
But, with a body of literature available on corporate cash flow, this daunting task of choosing the right tool and product can now be easily navigated. In the article that we have today, we shall talk about the different components of the corporate cash flow cycle and the products that CFOs and treasurers can use to manage the said cycle. Therefore, let us look into these components and tools without any more delay and enlighten ourselves better.
The Corporate Cash Cycle and Its Components:
In the first part of the article, we shall concentrate on what the corporate cash cycle is and learn about the different components of the same. As mentioned at the beginning of the article, the corporate cash cycle is where cash flows in and out of a business, and it is extremely important for businesses to manage this cycle so that they can stay afloat even in the most difficult times.
For those who have studied business or finance, the terms working capital, assets, and the like might already be known. However, for the uninitiated, we shall discuss a bit about these terms so that we can understand the cash management solutions much more effectively.
There are two main components of the corporate cash cycle- time and money. The money that we are talking about here is the amount needed to buy, store and sell inventory and to collect bills and invoices after a sale is made or an item is shipped. Experts suggest that the corporate cash cycle is also known as the cash conversion cycle and is a process that measures the time taken by a company to convert the investment and inventory into resources and cash flows, respectively.
There are three parts in the formula to calculate the cash conversion cycle. However, before we proceed to the formula, let us look at what these three parts are.
The DIO or the days of inventory outstanding is the average number of days taken by a company before it sells an inventory. The DIO measures the cash flowing in the business.
DSO is the days sales outstanding and also measures the cash inflow of a business. It is the number of days taken by the company to collect payment from its customers and clients.
Finally, the DPO or the days payable outstanding measures the cash flowing out of the company. This ratio measures the number of days that the company takes to pay all its bills and clear its financial obligations.
Now that we know what these stand for, let us look at the formula for calculating the corporate cash flow. CCC= DIO + DSO – DPO. Once a company calculates the cash flow, it becomes incredibly easy to manage the cash flow.
Products the Help Manage the Cash Flow:
As we mentioned, there are a number of products, tools and cash management services available on the market that help come up with the right solutions to manage the corporate cash flow. ERPs, a carefully structured treasury management system, e-invoices, payments, trade and reconciliations are all solutions that help a company track and manage its cash flow.
Since times immemorial, banks have been the ones to provide these traditional cash management solutions. However, now with a number of fintech companies mushrooming all around us, there are several options to choose from. Plus, these cash management solutions have become more enhanced, comprehensive and digital.
Managing the cash flow cycle is one of the most important functions of any business. Effective management of cash helps businesses to navigate through difficult times and stay afloat even in the face of adversaries. Therefore, the discussion that ensued drives home the point that corporates cannot slack in calculating the cash flow cycle lest the entire business could suffer from a cataclysmic fall and find it difficult to recover.