Question

Cash management has been described as a risk control device rather than a driver of profitability. What exactly do you think thinks means?

Answer 1

Any factor is consider as a driver of profitability when it has a role to play in increasing the bottom line of the organisation, i.e., net profit / earnings.

A profit driver can be financial or non-financial depending on the fact whether it can directly be quantified in monetary terms w.r.t. the functioning of the business. Cost of sales, volume of sales, direct costs like labour, fixed costs like rent, etc are drivers of profitability. Any increase in revenue or decrease in cost adds to the profitability. Whereas any decrease in revenue or increase in cost reduces the profitability.

Cash management, on the other hand, is a tool of risk management. It includes management of cash inflows and outflows in order to ensure appropriate solvency and liquidity as required in the business.

Eg: managing receivable turnover cycle (debtors collection period), creditor rolling cycle, increase collection, etc. It can also involve managing excess liquidity by investing in short term avenues / investments and there could be decent returns from the same. However, it should not be the sole aim of cash management. The nature of business of the organisation is to conduct its business activity unless a firm is engaged in trading in short term investments.

Thus, cash management is a risk control device and not a driver of profitability.