Cash management is the practice of managing a company's financial assets to maximise liquidity while minimising costs and risks. Along with collecting revenue and ensuring bills are paid, it involves forecasting financial needs, optimising payment terms, and preparing for economic shifts to ensure a business can comfortably meet its short-term obligations. Getting cash management right is crucial: according to research by the Federal Reserve and JPMorgan Chase, 51% of businesses struggle with uneven cash flow, and the typical firm holds just 17.6 days of cash reserves.

Below, we'll cover how cash management works, why it's important, potential challenges to consider, and ways to improve your business's cash management.

Key Takeaways

• Effective cash management goes beyond basic bookkeeping to actively balance incoming revenues and outgoing obligations, ensuring your business maintains the necessary liquidity to survive seasonal fluctuations and unexpected expenses.

• Profitable businesses can still fail if cash is tied up in slow-paying accounts receivable or trapped inventory; rigorous cash flow forecasting provides the visibility needed to spot shortages before they disrupt operations.

• Surplus cash should be put to work rather than sitting stagnant in low-yield accounts, requiring businesses to use short-term financial instruments and automated sweeps that optimise returns while strictly managing risk.

How does cash management work?

Cash management is the practice of monitoring, analysing, and refining the flow of cash in and out of a business. Although often conflated with broader cash management, cash flow management has a narrower focus, centring primarily on the day-to-day timing and tracking of cash inflows and outflows. Here's how cash management typically works:

• Cash collection: Get cash into the business as quickly as possible to shorten the cash conversion cycle. Tactics include simplifying the process of receiving payments from customers with faster invoicing, offering multiple payment methods, and using electronic payment systems such as Automated Clearing House (ACH) in the US or Single Euro Payments Area (SEPA) in the EU to speed up transaction times.

• Cash disbursement: Manage the outflow of cash to meet business obligations without holding too much idle cash. This can involve scheduling payments to take advantage of creditor terms or using precisely timed electronic payment methods.

• Cash forecasting: Predict future cash flow to help show when cash might be tight and when there might be a surplus. Regularly monitor your working capital ratio, or your current assets divided by current liabilities. This involves analysing cash flow patterns over time and considering future plans and market conditions.

• Investment management: Use any surplus cash. This can include investing excess cash in short-term, low-risk instruments like treasury bills or money market funds, which provide a return but can be quickly liquidated if cash is needed.

• Bank relationship management: Maintain good relationships with banks to negotiate better terms for fees, gain access to better investment products, and ensure that the business has access to additional funds through lines of credit, if needed.

Types of cash management solutions

Businesses have access to a wide spectrum of tools to handle their liquidity, ranging from traditional institutional services to modern digital platforms. The right cash management solutions depend on the company's size, transaction volume, and need for automated oversight.

Cash management solutions generally fall into one of three categories:

• Traditional bank cash management services: Offered by major commercial banks, these legacy institutional suites are designed for mid-market to enterprise businesses. They include comprehensive tools such as lockbox services for mail-in payments, zero-balance accounts (ZBAs) to consolidate funds, and dedicated lines of credit. While highly secure and robust, they often come with steep minimum balance requirements and complex fee structures.

• Cash management software and fintech platforms: These modern software solutions integrate directly with enterprise resource planning (ERP) systems, accounting software, and payment processors to automate cash visibility. They specialise in real-time cash flow forecasting, multicurrency tracking, and automated accounts receivable/payable matching, reducing the manual labour required to monitor liquidity across multiple business accounts.

• Cash management accounts (CMAs): Cash management accounts are distinct financial product types usually offered by nonbank fintech firms and online brokerages. CMAs combine the high yields typical of money market funds with the liquidity of current accounts, often providing fee-free overdraft protection and debit card access. They have become an increasingly popular option for small-to-medium-sized businesses looking to earn competitive interest on operational cash without locking it into long-term certificates of deposit.

Cash management software vs. bank cash management services

Bank services and cash-management software are often complementary rather than competing alternatives. Many businesses use banks for accounts, payments, liquidity, and financing, while using software to consolidate data and coordinate forecasting and workflows across banks and internal systems. "Real-time" visibility depends on the frequency and quality of the underlying bank connections.

Why is cash management important?

Cash management is a strategic practice that impacts a business's ability to operate effectively, invest wisely, and grow sustainably. Businesses in every industry can experience cash flow problems. Here's how proper cash management can help:

• Maintaining liquidity: Cash management ensures a business always has enough liquid resources to meet its immediate and short-term obligations, such as paying employees, suppliers, and creditors on time. Effective cash management allows a business to operate without unexpected cash shortages, which could damage its reputation or cause disruptions.

• Financial stability and solvency: Good cash management practices help a company maintain financial stability during downturns or when unexpected expenses arise. This allows the business to remain solvent and continue operating without the need for expensive emergency funding.

• Cost reduction: A strong strategy for managing cash helps businesses minimise the costs of borrowing. Knowing when cash will be available can reduce the need to draw on lines of credit or take out cash flow loans.

• Maximise profits: With effective cash management, companies can maximise their profits by investing surplus cash to yield returns without compromising liquidity. This can improve a company's earnings from interest or other investment income.

• Risk management: Cash management safeguards against financial risks such as currency fluctuations, interest rate volatility, and changes in market conditions. By maintaining an optimal level of cash, a business can insulate itself from these risks and more readily adapt to counter financial pressures.

• Strategic planning and growth: Effective cash management facilitates more accurate financial forecasting and budgeting, which are necessary for strategic planning. Understanding cash flow patterns helps businesses sustainably plan for growth and expansion.

What is in a cash flow statement?

A cash flow statement is a financial document that provides detailed information about a company's cash inflows and outflows over a specific period. In a 2024 survey, 51% of small employer firms cited uneven cash flows as a major financial challenge. Here are the three main sections on this kind of statement.

Operating activities

• Cash receipts from customers: Money received from sales of goods or services

• Cash payments to suppliers and employees: Money paid out for operating expenses, including wages and inventory

• Interest paid and received: Cash paid for interest on loans and received from investments

• Taxes paid: Money paid for corporate income taxes

• Other operating cash flows: Miscellaneous cash transactions related to core business operations

Investing activities

• Purchase of equipment and assets: Cash spent on acquiring long-term assets such as machinery, buildings, and land

• Sale of equipment and assets: Cash received from selling long-term assets

• Purchase and sale of investments: Cash spent on or received from buying or selling investment securities

• Loans made and collected: Cash outflows for loans given to others and inflows from loan repayments

Financing activities

• Issuance of stocks and bonds: Cash inflows from issuing shares or bonds

• Repayment of debt: Cash outflows for repaying borrowed funds

• Dividends paid: Money paid to shareholders as dividends

• Other financing cash flows: Cash transactions related to the company's financing structure, such as obtaining and repaying a mortgage.

Examples of cash management

Here are some real-world examples of cash management strategies in action across five different industries at both the startup and enterprise scales.

Example 1: Retail

A retail company implements a cash management system that automates the reconciliation of daily sales data with bank deposits. This ensures all sales are promptly accounted for and deposited and reduces the risk of errors and delays in cash flow. The company also negotiates early payment discounts with its suppliers, which allows it to save on procurement costs and improve its working capital position.

Large retailers typically deploy dedicated treasury workstations, lockbox services, and automated cash-sweeping accounts to manage high-volume daily revenue across thousands of register endpoints.

Example 2: Manufacturing

A manufacturing company uses cash flow forecasting to anticipate periods of high demand for its products. By accurately predicting when it will need to purchase raw materials and pay for labour, the company can secure financing in advance. This keeps operations running and avoids costly production delays due to cash shortages.

Global manufacturers rely on multicurrency ERP integrations and automated supply chain financing programmes to coordinate international vendor payments and raw material procurement.

Example 3: Professional services

A professional services firm offers clients discounts to incentivise early invoice payment. This encourages swift payment, accelerates cash inflows, and improves the firm's cash flow. The firm closely monitors its accounts receivable, follows up on overdue invoices, and implements collections procedures, if necessary.

Lean professional service startups often rely on automated billing tools and integrated payment links to minimise administrative overhead and shorten their cash conversion cycle.

Example 4: Technology

A technology start-up invests its surplus cash in a diversified portfolio of short-term, low-risk securities. This allows the company to earn interest on its idle cash while maintaining liquidity and funds for future growth initiatives.

Mature technology enterprises manage complex multientity global structures, utilising sophisticated corporate treasury desks, money market funds, and hedging instruments to protect foreign exchange exposure across international markets.

Example 5: Non-profits

A non-profit organisation receives a large donation from a philanthropist and works with a financial adviser to invest a portion of the donation in a long-term endowment fund. This generates a steady income stream to support the organisation’s mission while preserving the principal for future generations.

Large institutional non-profits manage segregated restricted funds, compliance reporting, and multitiered board-approved investment policies to ensure fiscal transparency and long-term solvency.

What are the challenges of cash management?

Cash management can present its own challenges, including unpredictability and low visibility. Here’s a closer look:

• Unpredictable cash flow: A sudden drop in sales due to economic downturns, a delay in a major project, or even a client's financial difficulties can leave you scrambling to cover expenses. This unpredictability makes forecasting a challenge and can throw even the most careful plans off course.

• Late payments: Chasing late payments takes time and resources for reminders, follow-up, and potentially even legal action. Late payments can delay your own payments to suppliers and vendors, damage your credit rating, and impact your growth.

• Unexpected expenses: Unforeseen events can quickly drain your cash reserves and force you to look at financing options, which might not always be readily available or affordable. Even the most well-run businesses can face issues such as equipment failures, sudden employee departures, or natural disasters.

• Overspending: Overspending on marketing campaigns, new hires, or office space can quickly deplete your cash flow, especially if your revenue growth doesn't keep pace. It's important to maintain financial discipline and prioritise spending that directly contributes to your bottom line.

• Poor financial visibility: It's difficult to manage cash flow without accurate, up-to-date financial information about your current cash position, upcoming payments, and outstanding invoices. Poor financial visibility can affect informed decisions about spending, investments, and day-to-day operations.

• Fraud and theft: Businesses are vulnerable to fraud and theft, both internally and externally. Employee embezzlement, vendor fraud, and cyberattacks can all cause major cash losses. Businesses can protect themselves with strong internal controls, regular audits, and cybersecurity measures.

• Regulatory changes: Changes in tax laws, industry regulations, or broader economic policy can also impact cash flow. Staying aware of these changes and adapting your cash management strategies accordingly helps avoid unexpected financial surprises.

How to improve your cash management

Improving cash management is an ongoing process that requires attention to detail and strategic planning. Here are some effective ways to keep your cash flow in a favourable position.

Refine accounts receivable

• Track your Days Sales Outstanding (DSO) to measure how efficiently your team collects payments and to identify bottlenecks before they stall cash flow

• Incentivise customers to pay sooner by offering a small discount for early payments.

• Implement automatic payment reminders to gently nudge clients who might have overlooked your invoices.

• Send invoices promptly. For online businesses, leverage integrated digital payment links, automated recurring billing engines for subscription models, and accelerated payout features to minimise gateway clearing delays.

• If you need immediate cash, sell your invoices to a factoring company at a discount.

Manage accounts payable

• Negotiate longer payment terms with your suppliers.

• Take advantage of any early-payment discounts from suppliers if you have the cash on hand.

• Strategically prioritise bill payment to avoid late fees and maintain good relationships with vendors.

• For digital-first businesses, use virtual corporate cards and automated accounts payable platforms to track recurring vendor bills and optimise SaaS payout schedules

Forecast cash flow

• Project your expected cash inflows and outflows for the coming weeks or months.

• Keep a close eye on your actual cash flow and compare it to your prediction.

• Adjust your spending or explore financing options if you foresee a cash shortage.

• Account for the unique cash flow volatility of online business models, such as payment processor payout holding periods, merchant reserve requirements, and seasonal traffic or subscription renewal spikes

Reduce expenses

• Find areas where you can cut back or negotiate better deals.

• Identify any unnecessary subscriptions, services, or expenditures that you can cut.

• Compare prices for supplies, services, and other recurring expenses.

• Routinely audit your software stack and cloud infrastructure spending. Software bloat and unused SaaS licences are among the most common cash leaks for digital businesses.

Build a cash reserve

• Try building a cash cushion equal to three to six months of operating expenses to help you weather unexpected events

• Make saving a habit by automating transfers to your reserve account.

• Maintain an extra buffer for digital-specific contingencies, such as sudden payment gateway reserve holds or unexpected increases in platform transaction fees

Use technology

• Simplify bookkeeping, invoicing, and financial reporting with accounting software.

• Use cash flow forecasting tools to better understand your future cash position.

• Use payment platforms to make it easy for customers to pay you online.

• Deploy API-driven accounting integrations, real-time dashboards, and multicurrency processing tools to automate reconciliation and manage global transactions without manual administrative overhead

How Stripe Treasury can help

Stripe Treasury brings payments and finances together on Stripe, so businesses can receive, store, send, and spend funds in one place. It's built for startups and growing businesses that want to move money faster and spend less time managing financial operations. Platforms, marketplaces, and fintechs can also offer financial services to their users with Treasury for platforms.

Treasury can help you:

• Simplify your financial operations: Manage money, payments, card spend, payouts, and more from the Stripe Dashboard.

• Move money faster: Access settled Stripe earnings right away and send instant transfers to other businesses on Stripe without cost.

• Get more from your money: Earn cashback on card spend and Stripe fee credits on qualifying balances.

• Operate globally with ease: Hold balances in multiple currencies, convert only when needed, and send payouts to recipients in 160+ countries.

• Automate financial operations: Use agents to analyse cash flow and automate tasks such as paying invoices, moving money, and converting currencies within limits you set.

Learn more about how Stripe Treasury can help you manage your finances and payments in one place, or get started today.