What is a Cash Balance?

Cash Balance Definition

Cash balance is the money your company has in cash at any time. It reflects what you have in your bank accounts plus any physical cash. This is crucial for managing daily operations, cash outflows, and planning for the future. Cash balance management helps ensure you can meet your immediate financial needs. 

Cash balances are essential for all companies, be it a small business or a larger enterprise.

Cash Balance Importance

• Liquidity: Liquidity is your ability to cover immediate and short-term obligations without suffering a loss. Substantial cash balances mean you're ready to face unexpected expenses or downturns without panic. Without it, paying suppliers and fulfilling an employee benefit plan can be difficult.
• Negotiation Power: A strong cash reserve improves your position in negotiations with suppliers and clients. You can secure discounts for early payments, better payment terms, and even the upper hand in setting prices. 
• Investments: A healthy cash balance and cash flow also opens doors to investment and growth opportunities. When you spot a chance to expand, whether through acquiring new technology, entering new markets, or scaling operations, having cash on hand means you can act swiftly. You won't need to scramble for financing or pass up golden opportunities because your resources are tied up.
• Risk Management: A robust cash balance is a buffer, helping you absorb shocks without derailing your strategic plans. 
• Stakeholder Confidence: Investors, partners, suppliers, and a plan participant have more faith in your business's stability and longevity when they see a healthy cash reserve. It signals sound management and a forward-thinking approach, making your business a more attractive partner and investment.

Cash Balance Plan

A cash balance plan is a sophisticated and strategic approach to retirement plans that businesses can offer their employees. A profit sharing plan is a unique pension plan or employer contribution with a twist that combines a traditional pension with a 401k plan.

Cash balance plans are insured by the Pension Benefit Guaranty Corporation (PBGC).

How it Works 

In a cash balance plan, you set up retirement planning (a qualified plan) accounts for your employees, crediting them with a predetermined salary portion plus an interest credit, a fixed rate, or a variable rate tied to an index. 

There isn't a defined contribution limit to individual accounts each year, but it promises to pay these in the future. You are the retirement plan sponsor.

• Tax Efficiency: A defined contribution plan is attractive in the B2B finance world due to its tax efficiency and ability to accelerate retirement savings rapidly. Contributions to the plan are tax-deductible, reducing your business's taxable income and, thereby, your tax bill. For a high-earning participant or owner, the plan allows more contributions than a traditional 401k plan, enabling them to grow their retirement savings more quickly.
• Financial Security: Implementing cash balance plans tells your employees you're invested in their long-term well-being and economic security. A retirement saving plan can be robust for attracting and retaining top talent, adding a valuable DB plan to your compensation package.

Note: Plan assets in a cash balance plan document are pooled investments managed on behalf of participants, where each account reflects a hypothetical balance that grows through employer contributions and interest credits that will provide a defined benefit during retirement age.

Cash Benefit Formula 

Let's examine the cash benefit formula. You must ensure that the traditional defined benefit plan is adequately funded to meet future liabilities—the promised contribution limits to your employees. This involves regular reviews and adjustments to the contributions and interest credits based on actuarial calculations and your company's financial performance.

A cash balance pension plan design is not just a retirement savings vehicle; a defined benefit plan is a strategic tool that can help you manage tax, enhance employee benefit, and plan for future. By understanding and leveraging this tool, you can strengthen your business's financial health and provide your employees with a secure path to retirement.

Accrued Benefit

An accrued benefit is a future financial security that an employee can earn gradually. This concept plays a crucial role in retirement or pension plans.

Accrued benefits are essential in a defined benefit pension plan. These plans calculate the retirement income based on salary and tenure. The formula used to calculate this benefit considers the benefits an employee accrued over your service years.

Note: Social Security provides a government-guaranteed income for retirees, while a cash balance plan is a private, employer-sponsored retirement plan offering employees a predetermined benefit. They get their annual compensation plus interest, aiming to complement Social Security benefits.

Cash Balance and Accounts Receivable

The link between these two is crucial because accounts receivables are potential cash that hasn't yet landed in your account balance. If you have many unpaid invoices, it can look like your business is doing well on paper. However, until those receivables are paid, your cash balance won't increase. This situation can lead to a cash crunch where you don't have enough liquid cash to cover your immediate expenses despite selling more. 

To ensure a healthy cash flow, you must efficiently manage your accounts receivables. This means setting clear net terms with customers, gauging investment risk, following up on outstanding invoices, and even providing early payment discounts. The faster you can convert your accounts receivables into cash, the more robust your cash balance will be.

Efficient Accounts Receivable Management and Cash Balances

Here's how AR management can help you keep your financial ship steady and buoyant.

Here's how effective accounts receivable management plays a crucial role:

• Speed up Payments: By setting clear payment terms and following up promptly on invoices, you encourage faster payments. This means less waiting for money and more cash available when needed.
• Reduce Bad Debt: Sometimes, customers don't pay what they owe, and those amounts become bad debts—a loss for your business. Good accounts receivable management includes assessing customer creditworthiness before you extend credit. This step helps you avoid doing business with customers who will likely not pay, thus reducing the bad debt risk.
• Improve Cash Flow Forecasting: When you actively manage your receivables, you clearly see inflows. This insight lets you forecast your cash flow more accurately, helping you make informed decisions about spending, investing, or saving.
• Enhance Customer Relationships: Effective receivables management isn't just about getting paid; it's also about communication. You maintain good customer relationships by handling invoicing and collections professionally and courteously. Happy customers are more likely to pay on time and continue doing business with you, which helps keep your cash balance healthy.
• Identify Issues Early: Regularly reviewing your accounts receivable lets you spot potential problems before they escalate. Whether it's a dispute over a bill, a customer experiencing financial difficulties, or an internal error in billing, early detection gives you a better chance to resolve the issue without losing money.

Keeping a tight rein on your accounts receivable ensures that cash flows more predictably and swiftly into your business. 

This boosts your cash balance, giving you the liquidity to cover expenses, seize opportunities, and invest in your business's growth. 

FAQs

1) Is cash balance an asset?

Yes, a cash balance is an asset representing money or its equivalent that a company or individual holds.

2) How do you determine the cash balance?

To determine the cash balance, subtract the total cash outflows from the total cash inflows for a period, accounting for all receipts and payments.

3) What is cash balance in trial balance?

In a trial balance, the cash balance reflects the total cash available in the company's accounts.

4) What financial statement is cash balance on?

The cash balance appears on the balance sheet under current assets.