Cash flow management is the mobilization of company funds, the investment of these funds to produce income and compensation of the banks that support the process. Cash managers use most noncredit services of banks, as well as of some nonbanks.
The following services are included:
- Account reconcilement
- Funds concentration systems via checking accounts
- Depository accounts
- Electronic data interchange (EDI)
- Investment services
Cash flow management incorporates all activities impacting the "Statement of Cash Flows" found in annual reports. There are five basic areas of cash flow management:
- Collections: Cash from sales is funneled into a company's bank accounts, where it is available for use in the operation and growth of the business.
- Disbursements: Funds from these bank accounts are transferred to the accounts of various creditors, including employees.
- Bank relations: Banks that provide cash management services are coordinated. The aspects of bank relationships include evaluating and comparing bank services as well as negotiating fees.
- Cash forecasting: Future cash flows are predicted based on historical data and current marketplace information. Accurate cash forecasting is essential to determine the optimal liquidity a company needs for growth and operations.
- Borrowing and investing: Liquidity for current and future needs is sufficiently maintained, minimizing the interest paid on borrowed funds and maximizing return on invested funds.
Because global cash flow management is highly tax- and accounting-oriented, close working relationships with tax and accounting staff are vital. In addition, cash flow management requires coordination between treasury and operations. In today's volatile markets, it requires powerful electronic tools when gathering diverse financial information and formatting it into useful reports for decision making.
Sensitivity: The overcommitment of resources and expected future cash flows threaten the organization's capacity to withstand changes in environmental forces (e.g., interest rates, market demand, changes in regulations, etc.) beyond its control.
Financial markets: Movements in prices, rates, indices, etc. affect the value of the organization's financial assets and stock price, which may also affect its cost of capital and/or its ability to raise capital.
Employee/third-party fraud: Fraudulent activities perpetrated by employees, customers, suppliers, agents, brokers or third-party administrators against the organization for personal gain (e.g., the misappropriation of physical, financial or information assets) expose the organization to financial loss.
Interest rate: Significant movements in interest rates expose the organization to higher borrowing costs, lower investment yields or decreased asset values.
Currency: Volatility in foreign exchange rates exposes the organization to economic and accounting losses.
Equity: The exposure to fluctuations in the value of equity securities or income streams from equity ownership in an incorporated entity.
Commodity: Fluctuations in commodity prices expose the organization to reduced lower product margins or trading losses.
Financial instrument: The exposure to excessive management costs or losses due to complexity or unintended consequences of financial instrument structures.
Cash flow: The exposure to lower returns or the necessity to borrow due to shortfalls in cash or expected cash flows (or variances in their timing).
Opportunity cost: The use of funds in a manner that leads to the loss of economic value, including time value losses and transaction costs.
Investment evaluation: Relevant and/or reliable information that supports investment decisions is lacking, and the risks undertaken are linked to the capital at risk, which may result in poor investment decisions.
Business portfolio: Relevant and reliable information that enables management to effectively prioritize its products or balance its businesses in a strategic context is lacking and may preclude a diversified organization from optimizing its overall performance.
Ensure that all other business risks of the associated process are considered to create a 360-degree view of business risks impacting this process. A list of typical relationships between business processes is shown in the Process Classification Scheme.
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