Cash Flow – Planning and Importance in Decision Making

The financial stability of any company will depend on its cash flow. Do we want to know our economic reality? Make good decisions. Know if a certain project is viable? All the answers lead to the “Cash Flow“.

Cash Flow allows us to have a quick view of where we are treading financially. It Gives the light of where we are going in the short, medium and long term.

The low visibility of this data can affect the finances of any project. So, it is important to clearly review and interpret this report.

So that our company grows in a solid and sustained manner over time.

Structure of Cash Flow

Cash Flow is a financial report. It serves to differentiate the outflows from the silver income in a given period.

 In this sense, there are certain terms that are useful to know how to interpret its results.

To begin with, when we talk about net flow. We refer to the difference between expenses and income in the period that is being studied.

  • As an example of income charge for services rendered or money obtained from sales for the period.
  • Among the expenses are the rent of the premises or office.
  • The salary paid to the workers and the purchases.
  • We make raw materials to operate normally.
  • If the net cash flow is positive, this means that the income has been greater than the expenses.

On the contrary, if it is negative, it means that expenses have been above income.

We all want to be on the favorable side of the balance.

That is, to have a positive net cash flow.

Because, it allows us to make new investments, reinvest, settle pending financial commitments.

And, also face any difficult economic period.

There are three types of cash flow:

  • Financial: it is related to the company’s strictly monetary operations.
  • Operations:  Focuses on incoming or outgoing money from business operations.
  • Investment: It is money. That has been entered or spent for the use of a product. That will confer a future benefit. A good example may be the acquisition of particular equipment.

Cash Flow for?

The scenario for companies becomes very complex if they do not have the capacity to pay their obligations.

This does not mean that they are a bad company or that they do not have enough sales.

There are some companies.

That has a considerable level of sales and even higher than their expenses.

But, there may be significant time lags between the sale is generated and the payment is received.

This great detail can start to generate a small snowball that can even bankrupt a company.

The results of a cash flow allow having a vision of cash resources in the short and long term.

Cash Flow Working

Basically there are two ways to create it.

On the one hand, there is a manual or traditional.

That is, requesting the accounting books.

That have the income and expenses established and then creating a report containing data such as:

  1. Funds generated or used by operations.
    • Received from customers (Accounts receivable from other periods and the current one).
    • Payment to Suppliers
    • Payment Fees and Remuneration
    • Lease Payment
    • Interest Payment
    • Tax Payment
    • Total funds used by operations.
  2. Funds generated or used in investment activities.
    • Purchase of Fixed Assets
  3. Funds generated or used in financing activities (out of operation).
    • Third-Party Financing (Loans)
    • Financing of the owners (Capital contributions and withdrawals)
    • Total financing funds
    • Net balance

Decisions Made Based on Cash Flow

Since this report provides key information about the company, the decisions we can make over time are very varied.

Suppose we run a marketing agency.

The decisions that we can make having the mentioned tool are:

  1. Let us suppose that our sales are increasing and therefore our expenses too. Our clients pay us in 60 and 90 days, but our suppliers require us to pay in 30 days.
  2. A good cash flow analysis will allow us to make advance financing decisions and obtain a better rate.
  3. In case you need to buy supplies, buy them with available money.
  4. If you have to buy equipment, buy in cash or ask for a loan to invest.
  5. Can we cover our debts payable? This report will tell us if we need to speak to providers to request a debt extension or refinance.
  6. What to do with the excess money? Maybe we can remodel that meeting room that has been in need.

There are also other important decisions that we can make in the short term.

For example, what are the financial trends of our company for the coming months?

Can we anticipate higher profits or does everything indicate that a period of losses will come?

Valuable Recommendations When Preparing a Cash Flow

To prepare a report with accurate results. We must have all the information regarding the company’s collections and payments at hand.

Such information must be differentiated and organized.

Otherwise, inaccurate data will be obtained and few adjusted to reality.

If we have to acquire new goods (such as a new computer, for example).

Or, we think that we can assume new expenses. It is advisable to carry out simulations or future estimates.

Following the previous example, we would do this by changing certain variables. Such as sales levels, the number of clients, and existing costs.

In this way, there may be a clear projection of the effects of these adjustments. That will allow us to assess whether we can incur these new expenses or not.

Another key recommendation when preparing a cash flow. The gap that exists between generating a sale and receiving payment.

It is very important to have clarity and control over this number.

It is also essential to have good communication with our suppliers.

Define the payment terms with them based on the ability to pay our box.

So, we will not breach our obligations and maintain a high level of trust.

Do we want to maintain positive cash flow?

It is advisable to make monthly projections to meet the goals set. A highly recommended practice in this regard is to provision.

This means being prepared to pay a future expense.

The main difference between a forecast and a provision.

It is that the first is an expense that will be made in the future.

But, we still do not know when or how much, we only approximate.

Instead, the provision is when we are certain of when and how much we will spend.

So, we are preparing a fund for that expense in advance to avoid hitting the box.

Also, It is a valuable element to be prepared in contingency scenarios.

Making optimistic and pessimistic analyzes of our cash flow. This can shed light on the different options. That, we could take along the way. If these different scenarios are met.

When prepared for the negative, decisions will be more rational and in line with reality.

In summary, preparing and knowing how to interpret the cash flow will allow us to act correctly in certain scenarios.

It is the tool that can best locate us in the present. And, the one that allows us to make better projections of future income and expenses.

If there is a surplus of cash. We will be able to make decisions adjusted to our business reality or anticipate. The lack of liquidity at any given time.

Likewise, the cash flow will allow us to decide. If, it is necessary to require some type of credit at this time or not.