How To Manage Your Company’s Cash Flow?

Whether they are business creators or SME managers, many entrepreneurs focus their attention on the development of the activity and on the profitability of the company. They “just” follow the cash with the help of bank statements.

However, a profitable company which develops its activity is not immune to financial problems, in particular because an activity which develops often requires tying up additional cash (increase in WCR).

To secure the development of the company, it is essential to ensure regular and precise monitoring of cash and to anticipate its future evolutions in addition to activity and profitability indicators.

If  monitoring the bank accounts of the company on a regular basis allows a certain short-term cash management, being satisfied with this monitoring is not enough to ensure the financing necessary for the development of the activity.

In the event of tension or changes in the economic situation, the manager has no management tool to assess the impact of the possible measures. He therefore has no clear vision of the cost and the financial effects of the decisions he makes.

A company’s cash flow cannot be reduced to the sum of bank balances!

The sum of the balances of the different accounts of the company corresponds to the cash or money available at a time “t”. But it does not represent the cash or more precisely the net cash of the company.

When we talk about cash (or net cash), we are talking about the amount of financial resources available on a long-term basis, available to the company to act on the operation of its activity. Having cash available in your bank account is one thing; having stable and available financial resources to incur the costs necessary for the activity is another .

When an accountant analyzes your balance sheet, he calculates the cash flow by differentiating between two fundamental elements:

Working capital: which corresponds to the surplus of long-term financing

The working capital requirement: which corresponds to the cash necessary to finance the regular activity of the company.

Master the concepts of cash, cash management; working capital (FR) and working capital requirements (BFR) are fundamental to running a business, regardless of its size or age. This notably involves setting up a cash flow plan and regular monitoring of the company’s net cash.

This makes it possible to steer the company by anticipating future financial difficulties and adapting corrective actions as best as possible.

Cash flow and negotiation with financial partners

controlling the company’s cash flow, a vital taskMoreover, when a need for external financing arises, a good knowledge of the situation reassures potential partners and helps to negotiate good financial conditions. This knowledge is visible through the history of the management indicators and the mastery of the economic model and, ultimately, of the company’s financial mechanisms.

Anticipating and measuring the extent of the difficulties and showing good management quality through indicators and relevant forecast financial tables are essential to work in confidence with your financial partners (partners, investment funds, bankers, etc.).

Cash: a vital concept to manage your business

The treasury is comparable to blood for the human body, it provides the energy necessary for the various services to function. Just as a body that bleeds out loses its strength, a company that loses its cash freezes and becomes incapable of acting or reacting. A company can only operate when it has sufficient financial resources necessary to finance its activity (salaries, taxes and duties, suppliers, etc.).

A leader cannot manage his business if he does not have a vision and if he has not planned enough cash to finance his activity in the months to come. As mentioned above, to respond to this constraint, too many entrepreneurs focus their attention on activity and profitability, forgetting to monitor their net cash. Developing without monitoring your cash flow is like playing sports without ensuring that your body will be able to keep up. You risk exhaustion or, on the contrary, high blood pressure and heart attack. It is the same for the company!

Never forget that, in the vast majority of cases, developing the activity increases the need for cash (which is calculated through the Working Capital Requirement – ​​BFR)

It is also necessary to work together with its financial partners in order to be able to negotiate from a position of strength when all is well and to react quickly if necessary.  This requires monitoring and anticipating financial movements using appropriate tools.

When is it advisable to follow your cash flow closely?

Cash management: a vital task for all businesses.All the time ! The company is in perpetual activity, this generates a permanent need for cash. Thus, the manager’s attention to the good performance of his net cash must be present:

When your accountant presents the balance sheet.  He must discuss with him the cash flow as well as the financing cycle of your activity.

When a business creator makes a business plan . It includes a provisional budget and a cash flow plan. This approach is crucial, because it ensures that the economic model of the project generates enough cash and that the company will have enough cash to develop.

When an entrepreneur thinks about a development project.  The provisional budget and the financing table make it possible to ensure that the financing plan is sufficient to give the project every chance.

When an entrepreneur has to face financial difficulties.  The provisional budget, the cash plan and the provisional management of its cash flow are key elements in defending the restructuring plan with employees and partners (banks, suppliers, shareholders, customers, etc.).