You need to understand what cash flow is and how it can help control and organize your business. Learn more in this article.If a business owner looks only at the money coming in from sales or contracts, he may be misled about the company’s situation. A spike in sales or the expiration date of the contracts creates an impression that there is money left over, but without looking at the expenses ahead, this information about the company’s financial reality is hidden.
What is cash flow
For a company, Cash Flow is the movement of cash inflows and outflows from the company’s cash, that is, what you receive and what you pay in your business . For a good control of cash flow, it is necessary to guarantee detailed records of gains and expenses , with discipline and without errors. In a daily, weekly or monthly view, it already offers verification and analysis tools for your business.
To make the process more efficient, all income and expenses, however small, need to be recorded. It is common, in small companies, for this organization to start with spreadsheets, but the most recommended is to move towards more complete tools, such as an online management system .
Based on this survey, which is a basic and indispensable financial management action , it is possible to have a true database. With it, the business owner has the necessary subsidies for decision making.
This is because, when realizing the cash flow, he acquires a more precise view of the company’s financial situation. This means knowing, for example, that that week that seemed great for billing, in reality generated revenues close to expenses.
Let’s look at an example for you to better understand how essential it is to have this instrument:
- The good news:In a strategy to attract customers, you decided to hold a week of special discounts. As a return, at the end of the period, it sold 25% more than expected, reaching a turnover of R $ 72 thousand.
- The bad news: When recording the income and expenses for the period, he identified that the promotion made his expenses grow and, adding up all the amounts involved, he found a total cost of R $ 70 thousand.
- Conclusion:The cash flow threw a bucket of cold water in its celebration. What appeared to be an important profit hid flaws in the strategy, which narrowly left the negative balance.
For this example, it is clear that cash flow can often open the eyes of the business owner and bring bad news. But he is not the villain of the story. The instrument only reflects the results of its financial management actions.
In order to be well used and fulfill your objectives, it is ideal that you keep periodic reports with the numbers recorded in the cash flow. They can be daily, weekly, biweekly or monthly, depending on the company’s need to monitor financial movements. From the verification of the verified performance, the manager must go to the analysis, asking himself how he got to those numbers, both negative and positive.
The Brazilian Micro and Small Business Support Service (SEBRAE) , an entity that closely monitors the development of MSEs, also indicates the use and maintenance of cash flow. This instrument has several advantages, because with it, the owner of the company can:
- Predict, plan and control entries and exits in a given period;
- Assess whether the receipt for sales will be sufficient to cover assumed and anticipated expenses;
- Anticipate decisions regarding the lack or excess of money;
- Find out if the company is working with financial tightness or slack;
- Have subsidies to adjust the sales price up or down;
- Check the possibility of carrying out promotions and sales;
- Confirm whether your own financial resources will be sufficient to run the business or whether there is a need to seek extra money.
There are many advantages, aren’t there? So, for you to better understand how cash flow works, here are some models.
Projected cash flow
So far, we have highlighted the importance of recording income and expenses for a better understanding of a company’s financial reality. But the way in which the information originated in this survey is used is an equally fundamental step, this being the product of the so-called projected cash flow.
As the name implies, it is a projection. This means that, from the launches made, the manager can not only know their inputs and outputs, but plan future business actions based on the results.
In summary, it is possible to mention three functions of the projected cash flow:
- Organization:designing payments and receipts.
- Correction:design adjustments to stop losses and get out of the red.
- Affirmation:project investments in business growth and expansion.
As you can see, we are talking about an analysis of the present to build a future vision. If there is a mismatch between the deadline to pay suppliers and receive from customers , if the company spends more than it receives or if there is fixed capital, for example, the cash flow will reveal and, from there, an attentive manager will be able to define their strategies.
One of the main analytical tools of the tool is the graphics. Through them it is possible to visualize the performance curve, comparing revenues and expenses in a given period and identifying trends.
The same can be done individually. If the idea is to reduce costs, a comparative chart can clearly indicate which expenses have grown above average and, for this reason, demand priority in adjustments.
In addition to the cash flow, it is valid to carry out financial planning according to the external scenario, considering its expected results in view of economic and political estimates, for example.
Free cash flow
We keep talking about projection. Free or final cash flow measures the capacity to generate capital in the short, medium and long terms, indicating the existing balance in comparison with the so-called operational cash flow, that is, after discounting the payment of the debt service or the receipt new loans .
In practice, the manager works with two reports: the first projects the results for a period of 60 to 90 days, while the second works with a period of 2 to 5 years. With line graphics, it is possible to monitor how the business behaves and whether performance confirms or reverses expectations.
If the analysis results in a positive balance, indicating a surplus in the period, the strategy may consider actions to invest idle capital. In case of the opposite diagnosis, it is necessary to plan how to get the deal out of the red.
What does the future hold for your company: paying off debts, opening a new unit, borrowing , expanding inventory or closing doors? The answer may lie in your free cash flow.
Update and rigor in cash flow control
As we have said so far, cash flow plays an important role in the financial health of the business. But we must also point out that it will only have its function fully performed if you take care. And one of them is the strict control over entrances and exits. Do not ignore what the reports indicate. Trust the numbers and use that information wisely.
Another important precaution is the periodic update of the cash flow , as this way, results are presented as accurately as possible. Data of any kind, if out of date, can lead to misinterpretations about your finances. Likewise, you should focus on good mechanisms for collecting data.
It is also interesting to note that cash flow alone does not provide conclusive answers. We emphasize that it is just an instrument that helps companies to define planning with more accurate data.
We have prepared 7 practical tips for an efficient cash flow , check it out.
After control and updating, the analysis becomes an element that deserves care. Let’s say that when making the cash flow projection for the next 12 months, for example, you come to the conclusion that you will have more expenses (suppliers, employees, rent and others) than revenues and, consequently, a negative cash flow. What does that say about the company? It is very likely that it is not being viable and that some change needs to be made, either to reduce costs or to price products or services.
Does that mean, then, that negative cash flow is always a bad thing? No way. A negative flow can reflect a certain period of your company, however, if it is temporary and foreseen, there are no problems. It can happen, mainly, in businesses that involve some form of economy of scale, in which the initial value of the product is high, but with the increase of the customer base and, consequently, of the production, the price decreases. If the price were too high at the beginning, it would not be able to enter the market.