What it means
A strategy answers the awkward questions before they become urgent: how much cash must always be kept, what happens to anything above that level, and who may approve a large payment. Writing the answers down means those decisions get made calmly rather than on the morning the money is needed.
Most strategies have four parts: a liquidity target, an investment policy for surplus cash, a working capital policy covering credit terms and payment runs, and a funding plan naming the facilities available if cash runs short. The four parts must agree with each other, because an ambitious investment policy is worthless if the working capital policy keeps starving the buffer.
The strategy earns its keep when a business grows or when interest rates move. At 1% interest nobody minds a large idle balance, but at 5% the same balance quietly costs real money every month it sits still.
Equally, a business that never wrote down its buffer rule tends to discover the gap only once the buffer has gone. Review the strategy at least yearly, and after any major change such as a new market, an acquisition or a shift in how customers pay.
Boards usually want the buffer rule tested against a downside case in which the largest customer suddenly pays 60 days late. A good strategy also names who does what.
The person updating the forecast, the person approving payments and the person moving surplus into deposits should not be the same individual, both for control reasons and because the work quietly stops when that individual takes leave.
In practice
Real-world examples.
Example
A veterinary group's strategy states that no single bank holds more than 60% of group cash, that surplus above 75 days of cover goes into 90-day deposits, and that any payment over $25,000 needs two approvers. New practice managers are given the one-page summary on their first day.
Example
An exporter with revenue in three currencies writes a strategy requiring each currency to hold its own buffer, so a strong local balance never disguises a shortfall in the currency an upcoming supplier payment is due in.
Example
A fast-growing app company sets a rule that cash cover must never fall below 12 months of net burn, which effectively times its next funding round rather than leaving the decision to sentiment. When hiring plans push the projection below the line, the board either slows hiring or starts the raise early.
Think of it
“Cash management strategy is your plan for handling cash efficiently-optimizing the whole process.
Formula
Calculation
Target cash buffer = Average daily cash outflow x Required days of cover. Investable surplus = Actual cash balance - Target cash buffer.
A subscription business spends $600,000 a month on cash operating costs, which is $20,000 a day across a 30-day month. Its policy requires 90 days of cover, so the target buffer is $20,000 x 90 = $1,800,000. With $2,300,000 actually in the bank, the investable surplus is $2,300,000 - $1,800,000 = $500,000, which the policy directs into deposits of no more than six months so the money stays reachable.Case study
Seen in the real world.
Ashgrove Learning is a fictional training provider used here purely as an illustrative example. It had no written cash policy, so surplus cash drifted between a large current account and whatever deposit the office manager happened to spot advertised.
After a near miss where a $220,000 tax payment collided with a locked 12-month deposit, the board wrote a two-page strategy. It fixed a 75-day buffer, banned any deposit longer than six months, required the forecast to be refreshed weekly, and named a $500,000 overdraft as the emergency line. In this illustrative case the interest earned barely changed in the first year, but the finance team stopped spending a day each month arguing about which account to draw from.
Watch out
Common mistakes.
- Copying another company's buffer target without checking the underlying cash pattern. A business with monthly subscription income needs far less cover than one paid on 90-day milestones.
- Writing the strategy and never testing it. A buffer rule that has not been stress tested against a late-paying major customer is a statement of hope.
- Setting the strategy in finance without telling the commercial team. Sales staff who do not know the credit policy will keep agreeing terms that break it.
Questions
People also ask.
How long should a cash management strategy be?
Short enough that people read it, which in most mid-sized businesses means two or three pages with clear numbers.
Who should own it?
The finance director or controller writes it, but the board should approve it because it constrains spending and funding decisions.
Does the strategy change in a downturn?
The buffer usually rises and investment maturities shorten, on the sensible assumption that receipts slow before costs do.
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