Every commercial organisation is familiar with the concept of cash flow management. This is an important component of the financial management system of the company as a whole. This element can be called the cornerstone in matters of financial success. It includes tools such as determining the optimal level of finance, budgeting, calculating financial cycles, generating forecasts of future cash flows, etc.
Why is it important to properly manage the company’s cash flow?
First, let’s figure out what a cash flow is. This is a generalised concept for the sum of all receipts and payments of monetary resources, dispersed over time. They are united by a certain financial project or asset. Thus, one organisation has several cash flows, and they reflect the economic activity of the enterprise in all its many forms. The challenge for each commercially oriented entity is to manage cash flow as efficiently as possible. And this means ensuring financial equilibrium or even a budget surplus, constantly balancing between the amount of receipt and expenditure of finance, carrying out their time synchronisation.
Fundamental Principles of Cash Flow Management
In order to manage cash flows in the most efficient and effective manner, the finance department should adhere to the following basic principles:
Reliability of information
Management not only of monetary resources but also of the enterprise as a whole is based on full-fledged information support. At the moment, it is impossible to create a unified information base for organisations of all types. It should be noted that financial reporting standards at the international level began to form only in 1971. Until now, this process has not been completed, and the standards are still far from perfect. The version that exists at the moment allows for a variety of methods for determining individual indicators of the reporting system adopted by the company. But, not only will the accounting system differ at various enterprises in the country, differences also arise when compared with the accounting methods adopted in international practice. That is why, in order to apply the principle of information support reliability, it is necessary to bring different methods under one denominator, to carry out complex calculations under a unified approach.
As you know, each company has many cash flows, and they are all classified on different grounds, while the goals and objectives of the company are uniforms. It is necessary to optimise cash flows in such a way that they are balanced in their volumes, time intervals and other characteristics in the process of managing the company.
Cash flows are dispersed over time. Due to such unevenness, temporarily free resources are often formed at the enterprise. Money that is not used in a certain period of time can be classified as non-productive assets (since they are not used for production purposes in a specific period of time). If money does not participate in circulation, then over time it loses its value. This happens for many reasons, the most obvious of which is inflation. To prevent this from happening, it is necessary to distribute funds over time to achieve the greatest coefficient of their usefulness. Investment performance is essential to prevent cash depreciation.
What should be an effective cash flow management?
The effectiveness of the cash flow management system can only be in cases where accounts receivable at the enterprise are not launched and are as effectively controlled as cash transactions and accounts payable. All these factors are interconnected, and together they form an effective and efficient financial management system in the company.
The key points of this system are:
-the smallest time interval between the receipt of receivables and the repayment of accounts payable, and the first must always be ahead. Such synchronisation of positive and negative cash flows allows to achieve the maximum reduction in the balance of funds in the organisation’s current account, to use internal resources with the greatest benefit without resorting to borrowing (or reducing their participation), to reduce debt service costs;
-making all payments under the strict control of management;
-conclusion of factoring transactions (sale of receivables);
-development of a discount system for buyers who pay for products (work, services) ahead of schedule;
-maintaining an acceptable level of receivables through the development and adherence of financial policies;
-diversification of products in order to attract the largest number of buyers; this measure is designed to reduce the risk of non-payment for products by any counterparties. A good debt collection agency can help you out with this task.
-development of a flexible pricing policy.
This type of cash flow management can be called ineffective when:
-there are delays in wages;
-accounts payable grows not only to partners but also to the state;
-the volume of overdue debt on bank loans is growing;
-asset liquidity is steadily declining;
-the duration of the production cycle is too stretched due to the unstable supply of raw materials, semi-finished products and energy resources.
Any business decision is about money. Companies that face problems with the turnover of funds are forced to spend almost all their energy on money management. And it does not matter what kind of profit the company shows, if there is no money then this is a problem. The state of the company’s business processes not least of all affects the manageability of the monetary resource. By making business processes more efficient, we achieve our goals. After all, managing money does not mean having an abundance of it. To manage means to provide the business with the necessary financial resources. Necessary for solving current and strategic tasks.