Improper management of cash flow in a company can lead to serious financial problems and even bankruptcy. This is a problem that many organizations struggle with (most companies do not plan cash management – neither in the short nor in the long term). Cashflow comes to the rescue – a document that shows the financial situation of the company. How can organizations address the challenges of cash planning and management? How does cashflow help stabilize the company’s financial situation?
What is cashflow?
Cashflow (cash flow statement) is one of the elements of a company’s financial report. This document summarizes the cash flow, taking into account the sources of income and how the money is allocated. All data must be entered accurately and without errors – estimates do not count here. Cashflow helps you quickly assess the company’s financial liquidity. Thanks to it, it is known how a given company copes with the settlement of liabilities (e.g. wages, bills) or its effectiveness in collecting receivables.
Cashflow is an indicator that should be monitored on an ongoing basis. It shows what path the company should follow – limit its activities, stay the course or develop.
How to monitor cash flow?
Every entrepreneur should carefully monitor cash flow. There are special indicators that help assess the effectiveness of activities – KPIs. Choosing the right KPIs for cashflow depends on the type of business your company runs. However, there are some universal indicators that can be used across all industries:
Cash conversion cycle (CCC) – a very important indicator that determines how many days it takes a company to convert inventory into cash. Its value depends on the time of strict work (e.g. the production process) and the time needed to repay debts. The shorter the CCC, the better.
Debtors days – an indicator determining how many days the organization needs to repay its debts. Just like CCC: The shorter the better – it means that the company can quickly repay its liabilities.
Inventory turnover – an indicator that determines how quickly a company converts inventory into cash. The higher it is, the better – it means that the company can effectively manage its inventories and convert them into cash.
Free cash flow – an indicator determining how much money the organization will have left once operating costs and investments are covered. The higher it is, the better – it means that the company is able to generate additional money.
Operating cashflow ratio – an indicator that determines how much money a company generates from business activities (comparing the result with costs). The higher, the better – it means that the company is able to manage cash.
Cashflow – what problems may the company encounter?
Cashflow consists of cash flows from the company’s operating activities (most of the company’s assets), net cash flows from investing activities (everything related to investing), net cash flows from financing activities (e.g. external financing).
However, its creation sometimes causes problems. What are the most important problems that companies may face when implementing cash flow?
Improper delegation of responsibility for the implementation of tasks – late payments are the nightmare of entrepreneurs. Difficult cash management may be related to the overload of the finance and accounting department – perhaps administrative changes should be introduced?
Lack of accurate knowledge about current costs, expenses, cash flows – every company will need controlling tools (they facilitate cash forecasting). Without them, it is difficult to properly control cash flow – after all, all you need is up-to-date information.
Lack of current knowledge about the implementation of project budgets and services – the remedy here are modern CPM systems that monitor the implementation of tasks of individual departments and employees.
Messy statements of sales and purchase invoices – accumulating too many documents will inevitably lead to errors. Appropriate payment management tools are needed, e.g. Electronic Document Circulation.
Improper inventory management – as a result, profitability and cash flow in the company are disrupted. Volatile raw material costs can be difficult to predict and manage. Shortages of funds (caused by irregular revenues and constantly growing expenses) are also a bad sign.
Changes in the market environment that may disrupt proper cash management – e.g. economic recession, currency fluctuations.
Difficulties in controlling one’s financial flows – this may lead to unplanned expenses and, consequently, excessive debt.
Cashflow management – short-term and long-term
Managing cash for the long term results from neglecting short-term repayments. Short-term cashflow management only applies to current payments (monthly). In order for cash flows to be exemplary, it is necessary to build a model that will translate sales into cash flow (payments in cash, cards and payment systems).
It is worth investing in tools that will help monitor cash flow – e.g. Electronic Document Circulation (EOD). Such an application can improve the circulation of invoices. ERP transaction systems differ from separate invoice circulation systems – the first solution allows you to automatically approve invoices for payment. The second option involves many steps and is more work.
A good practice in accounting is to post invoices and bank statements, as well as to link the customer’s payment with a document or invoice. Employees of this department are looking forward to KSeF (National e-Invoice System), a platform for electronically issuing and receiving invoices.
How does business process automation affect cash flow?
Business process automation is useful in increasing the efficiency of cash flow management. It is worth paying special attention to cloud solutions that guarantee access to the latest technologies and trends in financial management.
What are the advantages of automation? It allows for quick and easy data analysis. An entrepreneur can constantly monitor account balances and forecast cash flows, so he or she does not have to worry about, for example, whether he or she will pay employees’ salaries on time.
Investing in automation solutions can – in the long run – bring significant savings.