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What Is Cash Management?

By Diana Kelly Levey · March 31, 2022 · 9 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

What Is Cash Management?

Cash management refers to the day-to-day process of gathering and managing one’s cash flow.

In business, cash management is typically handled by an individual or the team running the company in order to optimize financial performance. Effective cash management can also be important for individuals when they are setting personal budgets; the same principles can be highly profitable.

We’ll take a look at what cash management is, how cash management can benefit your finances, and a couple of potential problems to avoid.

Importance of Cash Management

Managing your cash, whether professionally or personally, lets you know how well you are tracking in terms of profitability and hitting goals. You’ll see when you have too much money going out or being spent versus money flowing as earnings, or income.

People who are monitoring cash management for businesses should be aware of the company’s outgoing and incoming payments so they know how the business is doing and where it stands. The same holds true for individuals: If you don’t monitor your money, you won’t know how your debt is tracking (say, by reviewing your credit card statements) nor whether your checking account balance is healthy or close to overdraft status.

There are a few key aspects of cash management to consider.

Maintaining Profitability

Cash flow management allows a company to track how profitable it is and where the business is headed. Businesses can use profit-and-loss (P&L) statements and balance sheets to help manage their cash flow and obtain a solid understanding of how their finances are faring. By watching how much money is coming in versus how much is going out, a company can forecast their potential earnings. These projections can help a business understand whether they will need to borrow money in order to support their goals, or whether expanding the business’ services or products would be a good idea.

This same principle holds true for individuals: If you keep a careful eye on your income and how it is being used against your needs, wants, and savings, you’ll know how “profitable” you are personally. Are you having a hard time staying current on your student debt, say? Or are you doing so well financially that you have savings to invest? Cash management can help you figure that out.

Facilitating Growth

Simply put, successful cash management facilitates growth. A well-managed business with a healthy positive cash flow is able to invest in itself. That means growth, which is a good thing! For example, when cash flow from operations exceeds expenses – woo hoo! – that money can be invested back into the company to do things like:

•   Opening a new brick-and-mortar store

•   Adding more employees to help grow a company

•   Paying for advertising or marketing services

•   Creating a new product line

To look at it from a different angle, good cash management can also mean gaining efficiency. Its principles may make more cash available sooner, allowing a company to make improvements and put more money back into the biz.

If you think about this at a personal level, good cash management opens doors to having a positive net worth and growing your wealth. Think about these examples of how optimizing cash management could help you:

•   Avoid overdraft

•   Pay off debt, whether high-interest credit cards or student loans

•   Develop an emergency fund with a few months’ worth of living expenses

•   Save for short-term goals, like a vacation

•   Stash money away to invest for longer-terms goals, like the down payment for a house or retirement

Forecasting for the Future

Here’s another reason why cash management is a valuable pursuit. By tracking income and expenses, you can forecast performance and make informed decisions. In a business realm, this means making projections and deciding where earnings should be invested. Does new equipment need to be purchased to ramp up production, for instance? Or will staff have to expand to meet demand, and if so, what will fund their salary and training costs?

For an individual, the same principle applies. By tracking your income and expenditures, you can be prepared for what’s ahead and your financial goals. If you see perhaps that your rent will go up in a couple of months or have an adjustable-rate mortgage that is ticking upwards, you need to be proactive and think about how you can reallocate the funds you have. Can you look into a balance-transfer right now so you can shed some high-interest debt? That could be a wise move if your expenses are rising faster than your income can keep pace.

There are several budgeting and tracking software options available to companies. These help them make a cash-flow forecast based on their liquidity, debts, and financial obligations. On a personal level, there are many budgeting tools online, as well as apps, that help you track your spending and saving, and let you carefully chart your financial future. Often, banks will offer checking and savings accounts with bonus features to help with cash-flow tracking.

Common Challenges with Cash Management

When thinking about cash management strategies, it’s important to recognize the challenges you may face. Money can be a major source of stress, and here are some of the inflection points that often crop up.

Underestimating Costs

Let’s say the person in charge of cash management at a company doesn’t have a good handle on the company’s expenses or looming costs (like a major price hike for materials). That can certainly cue up a cash flow problem. Having a qualified in-house or consulting financial officer review finances regularly can help. Good communication and planning can mean the difference between nimbly shifting to handle this situation or having a cash-flow emergency.

The same holds true on a personal level. Few people expect car trouble or their dog to get really sick. An event like either of those can throw a wrench in one’s financial stability. So too can accumulating high-interest debt on credit cards…or even just inflation. Recognizing that these events can and do happen and that these forces are at work is vital. So too is planning for them so you don’t get caught short!

Overestimating Profits

Here’s the flipside of underestimating costs: overestimating profits. Let’s say a business invests in a new product or an advertising campaign, and the forecasts anticipated a few possible levels of profitability. If the new endeavor winds up tanking and the expected revenue doesn’t materialize — that’s a major cash-management problem. The income that the company was counting on doesn’t flow in, and that can have a serious impact. Perhaps money will have to be reallocated, expenses cut, or staff reduced.

Similarly, one a personal level, one can have the same sort of cash management issue. It’s perhaps human nature to often assume everything will go smoothly at work and one will continue to do well and get raises. But think about how common it is to have one’s hours at work reduced or to be laid off. Or to start a side hustle and find it’s not as successful as hoped. These situations can really leave a person feeling the financial squeeze.

Bookkeeping Inaccuracies

When intricate or repetitive math is called for, human error can occur. A small error in calculations can have a big impact on a company’s bottom line. Problems can also occur when the cash manager doesn’t know all the ins and outs of the business on which they are working. For example, a 2020 survey from QuickBooks found that 61% of small business owners don’t know how much they spend each month. This makes it doubly hard to identify bookkeeping errors. If you don’t have the basic business metrics in your reach, noticing eros can happen all the more easily. One solution in this kind of situation: Consider investing in higher-quality accounting software or have a highly trained accountant step in.

Just as professional cash management errors can happen, so too can they pop up on a personal level. Let’s say you don’t keep good track of automated deductions and payments. You might wind up thinking you have more money on deposit than you do, overspend, and wind up with overdraft fees. These kinds of moments can happen often in modern life. There are many kinds of alerts that can be set up to help with this. You can be notified when a bank balance gets into the danger zone, for example.

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Effective Cash Management Strategies

Here are some ways to avoid cash flow challenges and reap the benefits of cash management strategies, professionally and personally.

•   Use linked bank accounts. Conduct business with reliable accounts that makes it easy to transfer, send money, and otherwise access your money. Also look for accounts that make it effortless to monitor transactions and receive notifications when money hits your account.

•   Negotiate payments, if needed. If, in business, cash flow is tight, it’s important to communicate with your vendors and other payees to work out better terms. Perhaps you can agree to Net 30 terms (meaning bills are due 30 days after receipt vs. right away) or a similar scenario. On a personal note, if you are strapped for cash, payment plans can be worked out with many professionals, from dentists to utility companies. If you need more advice on managing debt, consider a free or low-cost appointment with a nonprofit debt-counseling agency, like NFCC .

•   Consider using a line of credit. If you are a business practicing cash management and see trouble ahead, take steps, and soon. Sometimes you may know that an inventory or manufacturing issue is brewing. Getting in front of it is important, and you may be able to prepare by getting a loan or line of credit to keep your company on track. A business line of credit allows you to withdraw funds, repay them over time, and only pay interest on the funds you needed to use. If, on a personal level, you are feeling financially overwhelmed, you may want to look into talking to debt holders about renegotiating terms. You might also consider a personal loan to consolidate your debt at a low rate, making it possible to more quickly pay off your debts. This means less interest accruing and better financial health sooner.

•   Invest in tech tools. Cash management software can help you optimize business finances. It can help you track real-time payments and manage assets and expenses seamlessly. For individuals seeking to ramp up their financial acumen, there are plenty of digital tools available to help budget, save, and more. Apps can also help you automate payments, check your financial health, and alert you to necessary money moves.

   Cash management doesn’t have to be complicated. Using available tools and prioritizing one’s finances (whether for business or professional purposes) can help keep your wealth well-tracked and growing.

Better Banking with SoFi

For each of us, money management can sometimes feel stressful and challenging. But it doesn’t have to! Apply for a bank account online with SoFi and get to know a better banking experience. We have all kinds of ways to boost your finances, from eliminating overdraft fees to giving you access to your paycheck up to two days early if you have direct deposit. And we offer a super-competitive APY so your money makes more money!

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SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

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