Money is, in fact, the most liquid investment of the company: by means of money it is possible to directly pay for goods and services by taking advantage of discounts and discounts for cash payments. Therefore, one is often led to think that every company should aim to hold as much cash as possible; however, liquid money represents the least profitable form of investment in absolute, since it does not accrue any interest, unlike money on current account which accrues interest - at least nominal - minimum (in reality the real yield is usually negative). Liquidity has a higher cost of opportunity than other possible short-term investments, and for this reason a company's liquidity management strategy is always very important.

Managing money in a company therefore basically means deciding how much liquidity to hold. There are different money management policies, those of a more conservative nature require a lot of liquidity (with a greater load of expenses), those of a more relaxed nature instead provide for relatively few liquids (with lower direct expenses and greater indirect expenses - due for example to the loss of the discount for cash payment or loss of business opportunities).

Managing money and establishing the volume of liquidity are indispensable operations for the normal activity of a company, in fact, it must correctly manage commercial charges to maintain good creditworthiness and avoid losing a good name or running into financial problems. 

Source: Dolenc, P. & Stubelj, I. 2011. Poslovne finance s praktičnimi primeri. Ljubljana.

Managing liquidity means first of all establishing the optimal volume of liquidity to be held in the company's current account, after which you need to plan, monitor and adjust the cash flow budget.

The optimal volume of cash can be established on an empirical basis, but it can also be calculated analytically on the basis of certain assumptions and the following formula:

Where:

    C *… optimal volume of liquidity
    F ... fixed costs of access to money (e.g. activation of a short-term revolving credit)
    T ... annual volume of cash transactions
    r ... interest rate (both what the company loses by not making other financial investments and that on the bank loan that the company uses to ensure short-term liquidity).

 
However, even more important than defining the optimal volume of liquidity is the planning of cash flows, that is the money entering and leaving in a given period of time. In fact, cash flows indicate a company's real need for liquidity. The cash flow budget may be defined on an annual, monthly or daily basis, depending on the type and turnover of the company (smaller companies normally carry out fewer transactions and do not need such detailed monitoring).

For the cash flow budget, on one hand we must consider all the revenues that we expect to have depending on the payment habits of the customers and the company habits of granting loans. On the other hand, we must consider all the outputs that instead depend on the payment habits of the company (payment of suppliers, employee wages, contributions, taxes, rents and so on). For a good cash flow planning you need reliable data on commercial activity and a good knowledge of business policy (supplier credit policy, company credit policy, ...).

We illustrate below an example of cash flow planning and related commercial decisions.

Practical example.

 Source: Dolenc, P. & Stubelj, I. 2011. Poslovne finance s praktičnimi primeri. Ljubljana.