Personal money as well as the cash of a business are a real, obvious measurement and a critical part of your management, in normal periods, as well as exceptional periods.

Every entrepreneur should be concerned about the cash situation he generates, at all times, regardless of daily responsibilities.

Whether you are in full expansion of the activity or in a complicated situation, certain aspects must be treated with sobriety, interest and promptness.

Some of the most important aspects are related to cash management. You can’t spend the money you invoiced, but didn’t collect.

In brief, what is the cash flow (CF)?

It’s the amount of money or, if you want, the cash coming in and out of your business.

In simple terms, if this flow, illustrated by the difference between what comes in and what comes out is positive, then everything is in normal parameters: you make money, the operational flows, sales are up, you have new orders, you can hire staff, you manage to control expenses somewhat, and you have the funds to grow your business.

Don’t get too excited, because positive means over 0, the more, the better. But to have more and better is another discussion about optimization, strategic evaluation, and many other aspects.

If the flow is negative, then you should be concerned. Turn your attention to finding those elements in the operational, or financial aspects of your business that tip the balance below zero.

And here you can find that:

  • either the gross margin is insufficient to cover expenses, or you do not sell enough, or you do not reach your break-even point (where sales value = expenses),
  • or you are paid late, when your clients and your debt recovery process are deficient,
  • or there could be other reasons like: high debts, unscheduled expenses / above the established level, lack of control over the financial situation, etc.

Moreover, negative CF has the ability to limit investment and put pressure on the business.

Remember, without cash, you cannot survive in cases of uncertainty and crisis, even if your business grows and you record a large revenue, but fail to collect to maintain the business cycle. It is not the time to be dizzy, or to complain, but to act, to realize that change and adaptation are the only solutions.

What is the purpose of a cash flow statement?

It has many uses, obviously in managing the business, in performing financial analysis, as well as in establishing communication with partners, internal stakeholders (shareholders, employees) and external parties (suppliers, banks, investors, etc.)

You can use it to calculate:

  • Net cash flow: as the difference between actual cash inflows and actual cash outflows over a period of time,
  • The rate of return obtained by the investor after investing a sum of money in your business,
  • Yield per share: how much money you generate per share in relation to the share price, in percentages,
  • Liquidity, if you are able to pay your operating expenses, salaries and taxes, without worrying about tomorrow,
  • Reinvestment as an important part of growing your business,
  • Dividends, of great interest to owners.

Obviously based on cash flow you can perform a series of analyses:

  • You will know very clearly what your inflows and outflows are, what the total receipts and payments are, where the bleeding is and if you are collecting,
  • Allows the realization of economic and financial forecasts,
  • Helps planning payments and estimating receipts, making decisions regarding customers,
  • Provides control and decision support to you, the manager and allows you to avoid cash flow challenges.

CF problems can be numerous. From not being able to pay the bank loan (which will involve penalties), to discovering the chaotic payment policy and the clients who dictate your receipts at will (without respecting the contractual obligations), to knowing the fiscal repercussions when you can no longer pay the taxes due, to having dissatisfied employees who complain, in the worst case outside the company, (hopefully not to your competitors) and up to ……. a margin that descends into the berna,  under your desperate gaze.

Where can cash be generated?

As you know, there are several sources that generate cash for you, and we’ll present them here divided into flow categories.

Their understanding is paramount, when you want to know where to intervene and what decisions to make, when the test comes back negative. (I would remove « when the test comes back negative »)

  1. Cash flows from operating activities which includes the basic activities, production or provision of services, closely related to the expenses generated by them, such as transport, insurance, raw materials, etc.
  2. Cash flows from intesting activities, from equity, is the result of the reinvestment of cash, or outflow, also called capital expenditure in equipment, fixed assets, short-term or long-term investments and cash inflows, either from the sale of assets or from the use of assets. It also includes other investments that are not immediately and fully converted into cash. Investment expenses, such as the purchase of property, loans, etc. Income such as the cash received from property sold, loan drawdown, etc.
  3. Cash flows from financial activities like cash flow from shareholders, banks, investors. This net financial cash flow is calculated by subtracting financial expenses from the financial inflow.

These expenses include the redemption of treasury shares, repayments, etc. Inflows include cash received for the issuance of shares and loans made by the company. (These are balance sheet items, hence not revenue).

  1. The working capital(le fond de roulment) of the company, or the self-financing capacity of the company, the company’s money without bank debts, such as loans. Working Capital is used in the day-to-day trading operations ; it equals assets minus current liabilities.
  2. The balance from one period to another or the evolution of cash, found at the bottom of a cash flow chart.

How to efficiently prepare a cash flow ?

The cash flow statement is prepared at the end of the financial year, when you have the balance sheet and the statement of profit and loss, for the last year, this being the simplest and most common option. But you can also prepare a cash flow forecast after estimating the company’s annual budget because this cash flow is based on the estimated income and expenditure budget. Short, medium and long term cash flow forecasts can be obtained.

In the short term, the company’s daily cash requirements are covered. The period for which it is drawn up is usually between one week and three weeks.

In the medium term, possible future requirements are identified and the long-term forecast is refined. This is associated with the revenue and expenditure budget, revenue and capital cycles.

In the long run it is used to identify the need for cash for more than 5 years and is in line with the business plan.

Cash flow performance is monitored by permanent comparison of forecasts and actual values.

As you can see, the cash flow can be optimized very easily, just by focusing on a few main actions.

First be aware of its value and make a decision to calculate it as soon as possible.

Control and keep track of almost all your expenses, and here I suggest you keep track of suppliers and small daily expenses, using an Excel spreadsheet or software, if you can afford it. I can help you for free with an adapted dashboard. Exemple bellow.

Try to invoice customers on time, usually after the delivery of the products has taken place or the service has ended. An Excel spreadsheet can be very useful if you do not have dedicated software.

Politely remind customers systematically, according to a pre-established policy, that they must pay for what they bought. In a previous role, I established several such policies and I managed to recover receivables from litigious clients, who had delayed payment for more than 6 months.

Change your collection terms, to ensure your payments are received on time. Enforce even shorter payment limits, intelligently and reasonably.

Rigorously monitor slow-moving stock and obsolete goods to avoid blocking money; here an easy – to – use indicator would be the gross margin for each product or service line, or the KPI: the number of sales in that category in a week or month, relative to the total number of sales in the same period. What results did you get? Is it still profitable to carry that product, or do you spend money every day on its storage and promotion?

Be fair to your suppliers and make payments on time. Put yourself in their shoes, you want to have the cash fast, just like them. Actively participate in the circulation of money in the economy, do not block this cycle. Because with your money, the supplier pays salaries, utilities, their supplier, bank loans and who knows, maybe your supplier’s supplier is your customer, who did not receive their money to pay you, right from you !!!

Plan your investments according to the cash flow forecasts and after you have gone through the previous steps.

Do not invest before making cuts in expenses, new policies and testing, for a certain period, the new working methods. If you want to do the opposite, invest before you know where the money is going and making sure you collect on time, the responsibility for the future of your business is entirely in your hands.

Make a reserve fund, a financial backup to avoid blockages and inability to pay. Start with one for a period of 6 months.

Moreover, depending on the decrease or increase of market demand, prices can help you increase cash flows.

Also, you may be wondering, but what about profit ? is it more important than cash flow?

You can give the answer yourself, the profit is annual and can be what you want, bigger or smaller, it is something you can “work” on, but cash is like blood in the body. Without it you cannot survive. Without cash you go into insolvency, and in the worst case, into bankruptcy.

I am aware that maintaining a positive cash flow is a challenge for any entrepreneur, so I thought that maybe an easy-to-use excel chart would be useful to help you manage your current flows. Start to have better clarity in your business.

You can find the cash flow chart bellow. If you want to make forecasts for several years, using the history of your business, please contact me!

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