Corporate cash management is the process that a large organization uses to manage its cash flow. Some organizations call this function treasury management because frequently the organization’s treasurer is responsible for the process. The process includes setting policy, managing collections, completing short-term investments, and risk management. Each organization creates and implements its own cash management process.
The company sets its policy with regard to credit extension, payment terms, collection processes, and cash investment. Each one of these areas is a factor in the corporate cash management process. The credit extension policy is managed based upon the organization’s risk position. The payment terms granted to a specific group of clients is set in order to manage the company’s cash position. Certain clients may receive short payment windows, whereas other clients may have a longer time in which to pay invoices.
An organization must determine how it will manage its risk. Some companies are comfortable with a higher degree of risk in order to receive a greater return on some of their investments. These organizations may determine in their corporate cash management policies that they will extend credit to a larger group of clients. Certain of these clients may not make their payments, but by increasing the number of clients to whom credit is extended, the company is likely to gain more business than it loses.
Collection processes vary also by company and client base. Some companies choose to automate all or a part of the collection reminder process. Other companies may follow the payment patterns of their clients to determine when a reminder is necessary. Still other companies may use a carrot and stick philosophy to improve collections, where the client receives a discount if the client pays early but is subject to an interest charge if the client pays late. Each corporate cash management program should be personalized to the company and its clients in order to increase the company’s cash flow.
Some companies make short-term investments using the excess cash within the company’s accounts on a given day. The processes used to determine how much cash is in excess of the company’s daily needs are normally included within the corporate cash management plan. The treasurer will invest only that cash that the company will not use in a given day or time period. Many large companies make the short-term investments on a daily basis, whereas smaller companies might make the investment on a weekly or monthly basis.