Cash management policies are important for businesses and households to effectively control collecting, disbursing, and investing cash. Guidelines should be established for managing funds, allocating funds, and saving money to achieve the best advantage. Regularly reviewing the policy helps ensure assets are used to the best advantage.
Cash management policies are strategies that allow you to effectively control the process of collecting, disbursing and investing cash. Developing a specific cash management policy is very important to almost any type of business or organization, as well as to the process of effectively managing a household budget. For this reason, writing a policy that is responsive to the needs of the business or other organization is extremely important if the business is to meet its goals. As part of policy preparation, it is important to establish guidelines governing how money is spent, saved, and invested.
One of the first steps in developing a workable cash management policy is to establish specific procedures for managing funds as they are collected. For businesses, this means having a process for receiving payments, posting them to the business accounts receivable, and making sure those funds are deposited into the appropriate business bank account. The policy will often include instructions for posting and recording collected revenue in a timely manner, allowing the business to make use of those funds to pay its own invoices on time and avoid the possibility of late fees and penalties.
After the funds are properly recorded, the cash management policy will generally address the procedures for allocating funds for specific purposes. Within the context of those appropriations, specific checks and balances should be established to help control how those funds are spent over the course of the budget period. For example, if an annual budget allocates a fixed amount of funds for the purchase of French fries, the policy may be to allow the purchase of only a certain number of French fries per calendar month. Doing so helps avoid depleting all the funds allocated to the line item at once, ensuring that there is some benefit throughout the budget period.
A cash management policy not only addresses how and when money is spent, but also how and when money is saved. Typically, this means identifying a percentage of the total income received during a specific period and allocating it to savings or some type of investment venture. The goal here is to constantly keep cash in some sort of interest-bearing venture, an activity that over time helps build cash reserves for use during emergencies. By incorporating this component into the overall cash management policy, a business or household can save at least a little money and strengthen its financial stability.
The goal with a cash management policy is to provide guidelines for raising, spending, and saving funds to get the best advantage. As the business grows, the exact procedures within the policy are likely to change to meet new circumstances. By regularly reviewing the current terms of the cash management policy, owners and managers can ensure that company assets are used to the best advantage, allowing the company to achieve the highest level of return possible.
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