What is a cash management strategy?

A cash management strategy defines the approach and policies for managing business cash, including collection practices, disbursement policies, reserve targets, and the investment of excess funds. For professional service firms, a clear strategy ensures consistent practices that optimize cash position.

Key characteristics

• Defines collection and disbursement policies

• Sets reserve and investment guidelines

• Provides a consistent framework

• Aligns with business objectives

• Should be documented and followed

• Reviewed periodically for relevance

Why it matters for professional service firms

Without a strategy, cash management is reactive and inconsistent. A defined strategy ensures disciplined practices that optimize cash position over time. Professional service firms should document a cash management strategy that covers collection targets, payment policies, reserve requirements, and the investment approach.

Real-world example

Michelle's firm had informal cash practices that varied depending on who handled finances. Developing cash management strategy: collection target DSO of 35 days with defined follow-up sequence, payment policy to pay within terms but not early, reserve target of 3 months operating expenses, and excess funds invested in money market until needed—strategy documented and communicated. One year later: DSO improved from 48 to 37 days, the reserve target was achieved, and consistent practices were maintained regardless of who managed cash day to day. The strategy provided a framework for execution.