5 minutes

Cash and Collateral Management: A Necessity for Every Business

Money is not everything, some people say. Yet, we have to agree that in today’s dynamic business environments, money matters. Thus, cash management is essential for maintaining and monitoring any business’s cash flow to ensure that there are enough resources for any business operations to function properly. As many factors can affect the cash inflow and outflow of a company, such as bills, unexpected liabilities, investments, and more, cash management systems come into play. They ensure that the costs of operations and logistics are minimized while liquidity is maximized. 

This article provides clear definitions of cash management. Further, it establishes why cash management is crucial to your business growth. It also borders on the concept of collateral management, its importance, and how it relates to cash management.

What Are Cash Management Services & What Is Cash Management in Banking?

Cash management is the daily monitoring of cash activities (inflow and outflow), and common cash management services include:

  • Account Reconcilement
  • Treasury
  • Advanced Web Services
  • Overdraft
  • Lock Boxes
  • Electronic Funds Transfer 
  • Cash Collection
  • Depository
  • Automatic Clearing House Transfer 
  • Controlled Disbursements 
  • Return Items

Cash management in banking also deals with the management of cash inflow and outflow. Banks offer various services to handle accounts, cash disbursements, and collections for businesses. Furthermore, cash management allows clients and businesses to invest cash surplus in securities that bear interest until the business requires the funds. 

Why Cash Management Is Crucial to Your Business Growth

While we’ve listed some complex processes and banking services, rest assured that cash management is essential for your business growth on a daily basis as well:

  1. Financial Stability for Your Business: Cash management helps ensure your finances’ growth and sustainability. Cash is the primary asset for exchange and transactions; thus, it has to be managed to maximize your earnings. Cash balances constantly have to be maintained as well.
  2. Easy Access to Needed Funds: By generating enough cash, your company will be able to accomplish its daily tasks and needs without accruing debt. When your cash management system is integrated with online banking, for example, you will have more access and control over your cash flow. The best part is that cash management services can be customized to meet each business’s needs.
  3. Facilitates Investment: Engaging cash management services allow your funds to be invested in interest-generating securities, which can further boost your revenue, cash flow and growth over time.
  4. Allows Planning for Capital Expenditures: Good cash management allows businesses to plan for capital expenditures. As a result, they can easily maintain and upgrade their fixed assets, such as property, buildings, vehicles, and equipment.
  5. Maintains Legality of Business: An error in your financial accounts can cause serious problems. A good cash management system helps to audit cash receipts, money disbursements, and tax payments.
  6. Helps Avoid Cessation of Payment: When one can no longer settle their short-term debts, their business becomes in a state of cessation of payment. Monitoring your cash budget regularly will help you get better visibility of your cash flow. Thus, you can quickly identify any issues that might affect your finances and take the necessary action to remedy them.
  7. Saves Money: A good cash management system can help you save money on bank commissions, overdraft fees, interest on loans, and more.

What Is Collateral Management?

To fully understand Collateral management, one must first understand the role that collateral plays in business. Collaterals are a set of assets, cash, or securities given as a form of guarantee to a debtor by a creditor in an unsecured financial transaction. Simply put, it is a valuable asset pledged by a borrower as security for a loan. 

Collateral management is then the process of verifying, granting, and managing collateral transactions to reduce the credit risk or payment default by a debtor.  

Why Is Collateral Management Important to Your Business?

Given the coronavirus pandemic’s drastic effect on the market, collateral management has become increasingly important to businesses. Three of the major benefits of collateral management include:

  • Reduction of Counterparty Risk: One of the major reasons why collateral management is on the rise is its ability to reduce the risk for both parties. The use of collateral antedates crisis, and as counterparty creditworthiness increasingly becomes an issue, so does the rise in demand for collateral management. 
  • It Improves Access to the Market: With adequate collaterals in place, you will have more access to different instruments. In addition, the transaction documentation processing and credit approval will be less difficult with collateral management. 
  • It Facilitates a More Favorable Pricing of Credit Risk: Long-dated derivatives have implications on banks’ capital charges and balance sheets, so this causes them to incorporate risk-based pricing when lending. Collateral postings allow for a good reduction in credit risk. This way they reduce the associated funding and credit charges and facilitate more favorable pricing.

Relationship between Collateral Management and Cash Management

The major relationship between collateral management and cash management is their aim, which is to reduce risk and maximize liquidity. They both provide a measure of security for any business and its customers, by extension. Note that it is not the case that one can or should be chosen over the other. Rather, they should function as complements of each other, working hand in hand to maintain the business’ safety.

You can also improve your business relevance and reduce risks by employing digital innovations, such as Tarya’s advanced AI-risk models and financial management software.

Reduced defaults, increased revenue – just a click away!

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