The Cash Flow
Cash flow shows the cash inflows and outflows that a company generates over a given period of time. All cash inflows and outflows during the relevant period are aggregated to calculate the liquidity of an enterprise. Transactions that do not affect liquidity, such as provisions or impairments, are not included in the cash flow.
Why is cash Flow so important?
Cash flow is of paramount importance in calculating a company’s profitability and financial strength. It indicates whether the funds generated by the company are sufficient to ensure its sustainability. It provides information on a company’s competitiveness, available liquidity and insolvency risk, allowing for more accurate financial planning.
These are the reasons why cash flow is one of the most reliable and effective account management indicators. Indeed, cash only takes into account the revenues and expenses of a company that have an impact on cash flow. While reserves, fixed assets, patents or trademark rights can influence or embellish balance sheet results with accounting tricks, the cash flow is honest: it only honestly calculates what is actually left of the money at the end of the fiscal year.
When the company’s current revenues exceed the cost of operating and purchasing assets, this is a sign of a successful business model. On the other hand, if sales are too low or non-existent, the company risks financial difficulties, and in the worst case, insolvency.
This can happen in the short term when the company does not have enough money to pay the bills. Small and medium-sized businesses in particular can quickly get into trouble.
This is why companies need to pay close attention to their cash flow.
How is the cash flow distributed?
With respect to cash flows, there are three different areas: cash flows from operating activities, cash flows from investing activities, and cash flows from investing activities.
Cash flows from operating activities are generated in the normal course of business. It represents the results of all activities affecting cash flow. In the analysis of the annual accounts, operating cash flow is used to measure the company’s own financing capacity. If this value is positive, the company has the ability to repay the debt or investment.
Cash flows from investment activities are the revenues and expenses of a business from investments. Therefore, it is possible to determine whether the investments made during the accounting period have a positive or negative effect on the enterprise.
Cash flows from investment activities include all capital flows that result in a change in a company’s equity, such as raising capital through the issuance of shares or the distribution of profits and dividends.
When should you keep a close eye on your cash flow?
We don’t even ask ourselves that question all the time! The company operates on a regular basis, which creates a constant need for cash. Thus, an officer’s attention to the proper management of his net cash must be:
When your accountant presents the balance sheet. He or she must discuss the cash flow and the financial cycle of your transaction. When a contractor makes a business plan. It includes an interim budget and a cash flow plan. This approach is important because it ensures that the project’s business model generates sufficient liquidity and that the company has sufficient liquidity to grow.
When an entrepreneur thinks about a development project. Interim budgets and financial statements ensure that the financial plan is sufficient to create opportunities for the project.
When a contractor is in financial difficulty. Its interim budget, its treasury plan and its interim cash management are important elements in securing the restructuring plan with employees and partners (banks, suppliers, shareholders, customers, etc.).
How can you improve your company’s cash flow?
It is really important to monitor a company’s cash flow so that it does not become too tight. Find out how you can take action to preserve your company’s net cash position.
1-Compensation and Pay Management
Employee compensation is a heavy burden for many companies. If the regulations provide less margin on the pay day, it might be possible to make things more flexible by including bonuses, acting, the thirteenth month, etc.
Tools such as cash flow planning and monitoring allow you to forecast and anticipate cash requirements so that the company can best adapt to these recurring expenses, it is therefore important to know when to hire new employees and when to lay off employees who are not really needed by the company.
2-Reduce the number of outstanding customer invoices
Unpaid bills indicate, in days, the average time it takes a company’s customers to pay their sales bills. This term is an interest-free credit (or loan) given to the customer. When the company also borrows, it means that it insures the cost of credit to its customers!
3-Choosing your customers
A manager must be very attentive to the quality of his clients. It is essential to always keep in mind that an unpaid bill requires 3 times more revenue to cover this bill.
A company’s stocks represent both real estate liquidity and are subject to significant devaluation risks (degraded, obsolete, inappropriate, lost/stolen, inclement weather, etc.). By lowering the level of stocks (or by improving the rotation of stocks, we usually manage to have healthier stocks.)
This calculation is not an accounting obligation, it is an interesting indicator of the management of a company’s accounts, which is particularly related to other parameters such as self-financing and working capital requirements.