Cash Management is not Wealth Management: Here’s the Difference
Some financial terminologies start gaining significance only when your finances start becoming complex. Early in your career, you would never care if cash management and wealth management meant the same thing or not. Nevertheless, as you grow older and more financially stable, you realize the need for a financial advisor or manager. It is at this point that you understand that cash management is different from wealth management.
The financial sector comprises activities that are wide and overlapping. For instance, the financial investment division deals with both asset management and wealth management. The investment services include corporate fund sourcing and asset monitoring to ensure a balance between equity and debt. Both cash and wealth management involves handling your overall liquid asset.
Management of cash and wealth often sound similar, and any average investor may find them somehow confusing. Regardless of their close relationship, it is essential to note that cash management and wealth management are different. Here is how both differ.
1. Cash Management Focuses on Liquidity Position While Wealth Management is About Networthiness
Cash management involves collecting, managing and investing cash for a short term. An asset manager knows that cash movement determines the stability and the solvency of a company. It involves monitoring the cash receivables to reduce the average length of time they are outstanding. It also entails increasing collection rates and choosing the right short-term investment method.
All these activities should ensure that your entity can fulfill cash obligations as they fall due. On the other hand, wealth management aims to increase your net worth. Networth is the value of assets you own less all outstanding debts. It is the measure of your actual wealth. A steady increase of net worth denotes your assets are growing faster than your liabilities. A trend like this shows financial health.
A wealth manager should ensure the net-worth retains an upward trend. He or she can achieve this by increasing the investment portfolio. There should be a consideration for the market trend while selecting the type of investment. It should be an investment that guarantees good returns. When returns are high, they serve as a cushion against the net-worth decreasing as a result of increased obligations.
For instance, if the owner or wealth manager considers leveraging, he should select an investment option with higher returns than the interest payable on the loan borrowed.
2. Cash Management is a Part of the Entire Wealth Management Whereas Wealth Management is a Holistic Approach to Wealth
Managing personal or corporate cash flow is essential for determining your financial goals. Cash flow management entails budgeting which will require that you first analyze your expenses. Your personal asset manager can help you analyze your living expenses according to your current financial position. Then you arrive at a realistic budget. A cash flow statement that factors your income, liabilities, and expenses can lead to a course of action.
A surplus can suggest that you can consider investing and hence increase your wealth. On the other hand, wealth management entails clear strategies for growing wealth. It is a comprehensive plan that seeks to balance your needs for growth and risks. Wealth management touches on vast elements that includes investment planning, estate planning, retirement planning, tax planning among others.
Wealth management aims to help you build, preserve and enhance your overall financial position. It achieves this by bringing in all parts that are intimately interconnected and together reference your net worth.
3. Wealth Management Involves a Solid Analysis of Assets and Record Maintenance Whereas Cash Management Involves Cash-flow Analysis
Asset managers must exercise reasonable care and prudent judgment when performing asset research and analysis. They must apply due diligence to determine the best asset for investment. They should make decisions after an extensive review of the assets to ensure they meet client’s goals. After asset selection, record maintenance should follow.
Record maintenance is an integral part of wealth management as it provides measurable results of your commitments. It also simplifies the Asset manager’s work and other involved parties. For cash management, the asset managers will deploy a cash-flow-forecast to predict the future of your finances. This approach helps them ensure they make the most out of your money to achieve your financial objectives.
A cash flow analysis is prepared at the end of a period to help show your current position relative to your preferred financial position. It helps to identify the best course of action according to your particular situation, and it directs to the best asset allocation mix. Therefore, cash management becomes only a part of wealth management.
4. Cash Management is a Short-term Hypothesis Whereas Wealth Management is a Long-term Hypothesis
Cash management entails accumulating funds for short-term investments. Proper management of cash should yield a good surplus which you can invest. Cash managers should have well-laid strategies that ensure money collected is spent wisely to have enough savings for investments. A sure way of having healthy cash flow is through short-term investments.
In a corporate set up, business managers can deploy a list of avenues to secure cash flow at all times. These avenues include encouraging faster payments of receivables, delaying payment to vendors, cutting costs among others. Cash preserved should then be invested in more appropriate ways that optimize the return on the surplus cash. Short-term investments include term deposits, treasury bills, money markets instruments, money markets funds and more.
Wealth management, on the other hand, looks into long-term investments. Such investments include bonds, stocks and real estates which hold for more than a year. Mostly there are no intentions of selling these investments. Long-term investments have a lower degree of volatility thus exhibit a long-standing pattern of growth.
Historically, it pays off to retain investment over a long term. For instance, the stock market reflects overall growth in the long run. Other benefits of long-term investing include tax benefit on capital gains. Such gains are taxed at a lower rate than your income tax bracket.
Conclusion
From the above-given emphasis on both cash management and wealth management, it is right to conclude that both are essential for developing financially. Cash management helps you achieve wealth. Both are integral parts of your journey to financial stability, and therefore you must embrace all. The best way to handle both is to get outside expertise and avoid making mistakes that would cost your entire financial life.
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(By Racheal Muriithi)
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