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How do I Write a Cash Management Policy?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 03 November 2016
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    Conjecture Corporation
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Cash management policies are strategies that make it possible to effectively control the process of collecting, disbursing and investing cash. Developing a specific cash management policy is very important to just about 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 speaks to the needs of the company or other organization is extremely important if the business is to meet its goals. As part of the preparation of the policy, it is important to establish guidelines that govern how money is spent, how it is saved, and how it is invested.

One of the first steps in developing a workable cash management policy is to set up specific procedures for managing funds as they are collected. For businesses, this means having a process for receiving payments, posting them to the accounts receivables of the business and making sure those funds are deposited into the appropriate company bank account. The policy will often include instructions for posting and recording the collected revenue within a timely manner, allowing the business to make use of those funds for paying its own bills on time, and avoiding the possibility of late fees and penalties.

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After the funds are properly recorded, the cash management policy will usually address the procedures for allocating funds for specific purposes. Within the context of those allocations, specific checks and balances must be put into place that help to 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 potato chips, the policy may be to allow for the purchase of only a certain amount of chips per calendar month. Doing so helps to prevent exhausting all the funds allocated to the line item at one time, 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 endeavors. The goal here is to consistently put aside cash in some sort of interest-bearing venture, an activity that over time helps to build cash reserves for use during emergencies. By building this component into the overall cash management policy, a company 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 collecting, spending, and saving funds to best advantage. As the company grows, chances are the exact procedures within the policy will change to meet new circumstances. By periodically reviewing the current terms of the cash management policy, owners and managers can make sure the assets of the company are being used to best advantage, allowing the business to obtain the highest level of returns possible.

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