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Types of Cash Management

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Cash management is one of the pillars of finance. This is a broad area in finance involving the collection, handling, and usage of cash. This process involves the assessment of financial markets and cash flows. The cash management process utilizes many tools that are vital to the efficiency and accuracy of this process. These are some of the cash management types in finance.

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1: Cash flows from operating activities

This is one of the vital types of cash management. Here, a company’s cash flow statement is explained. The sources and uses of cash from ongoing regular business activities are illustrated. This is done for a particular financial period. This reflects any changes in the working capital for the business.

2: Free cash flow to equity

In cash management, this is the amount of cash a business generates. This amount can be distributed to shareholders in the event of a good performance of the business. This is important in determining the financial position of your business. This amount is calculated by taking the cash from business operations less capital expenditures of the business. Your business should always have increased cash flows to keep it above water.

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3: Free cash flow to the firm

Free cash flow

Free cash flow to the firm (FCFF) represents the amount of cash flow from operations available for distribution after depreciation expenses, taxes, working capital, and investments are accounted for and paid. FCFF is essentially a measurement of a company’s profitability after all expenses and reinvestments. It is one of the many benchmarks used to compare and analyze a firm’s financial health. It is through this evaluation that a firm can determine the amounts paid out to investors.

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4: The net change in cash

The net change in cash is the amount by which a company’s cash balance increases or decreases in an accounting period. When you own or consider buying stock in a company, it is important to monitor its net change in cash to make sure it doesn’t run out. It is also important to know this cash management type. It is through it that the effectiveness of your revenue-generating strategies can be determined. It will thus enable you to adjust accordingly.

The objectives of cash management include fulfilling working capital requirements, handling of unorganized costs, planning capital expenditure, appropriate utilization of funds, planning of capital expenditure, initiating investments. These cash management types should always be put into consideration to ensure the success of your business.

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