Cash flow management: our complete guide

Cash management is essential to ensure a company’s liquidity, financial stability and long-term viability. It optimizes cash flows, minimizes financial risks and ensures adequate financing for investment and value creation.

Before we talk about cash flow management, we need to define what is meant by the term ‘cash flow’. This term is regularly misunderstood or misused. In this context, cash flow refers to the amount of funding or financial resources available to a company at any given point.

Cash flow is not to be confused with profitability. What is the difference between the two? Profitability is the financial metric that measures the company’s ability to generate a profit at the end of an accounting period. To that extent, a company’s profitability is calculated by comparing its business revenues relative to its expenses, which includes all overheads such as fixed assets, shareholders’ equity, debt, and working capital requirements (WCR). 

Cash flow is the net amount of cash moving into and out of a business at a specific point in time. It includes cash balances, bank balances, and short-term investments that can be easily converted into cash. Effective cash management is crucial to its day-to-day operations, enables to meet short-term business objectives, fund investments, create value and ensure the company’s financial stability.

Another way to explain cash management is to consider its accounting definition. In a strict sense, cash management is defined as the difference between working capital (WC) and the working capital requirement (WCR):

                                                         Net cash = WC – WCR

To understand the formula, we can define each part as follows.

• WC: Working capital is the total amount of cash a company needs to function

• WCR: Working capital requirement refers to the amount of cash a company needs to achieve its goals in the medium term. In other words, it takes into account the difference between the value of current assets and current liabilities. 

TNWC: The total net working capital 

Cash flow management is the strategic planning, organizing, and controlling of cash flow, aiming to optimize its liquid assets, minimize financial risk, and ensure long-term viability.

Daily monitoring of cash flows and balances

• Analyze cash flows (both inflows and outflows) to determine the company’s cash flow requirements.

• Manage the cash balance and balance the accounts can be challenging, particularly when accounts are spread across multiple banks and there are numerous cash flows to track.

• Analyze the financial flows generated by the company’s economic activity.

Establishing cash flow and budget forecasts

Cash flow forecasting allows a company to plan its expenditures, manage its resources, and make strategic decisions suited to its financial situation. The treasurer must create cash flow forecasts over various time horizons:

• He estimates available equity in the short term.
• He defines and monitors cash flow plans for the medium and long term.
• He draws up the cash flow budget using information provided by management control and the chief financial officer (CFO).

The treasurer ensures that the financial requirements are covered, by monitoring the movement of the company’s financial flow such as client receivables and debts. He prepares reports to:

• Track key indicators such as working capital requirements (WCR) and total net working capital (TNWC).
• Analyze any discrepancies between cash budget and actual cash flows. 

Investing your surplus

A well-monitored cash flow allows a company to recognize its earnings and reinvest them to grow its business. Cash surplus can be used to finance future investment, to cover any outstanding customer payments, or simply be kept as a cushion fund reserved for any setbacks. 

Limiting financial risks

The treasurer must anticipate and reduce financial risks related to fluctuation in exchange rates, interest rates, late payments, and cash flow variations.

Strategies are implemented to minimize these risks and ensure the financial stability of the company.

Cash management provides Finance Directors and Treasurers with a clear overview of a company’s financial health. It provides a realistic gauge of its financial stability and ensures the smooth running of operations as well as secure transactions. 

By utilizing accurate and up-to-date data, Finance Directors and Treasurers are well-equipped to adjust their overall strategy, make appropriate decisions, and take corrective measures when necessary.

The benefits of effective cash management are clear. However, many companies face numerous challenges in this area. Why?

As explained above, cash flow calculation relies on gathering a large amount of data from subsidiary projections or an opening balance sheet and the income statement’s revenues and expenses.

Keeping track of this data is the first difficulty a treasury team faces in accurately assessing all the information at any given time. This difficulty is compounded when the company is large and has many branches (geographically and/or divided into subsidiaries).

Once this information is collected, it must be consolidated and analyzed correctly to make sound strategic decisions. This process requires time and a great deal of attention. In other words, effective cash management starts with establishing a competent treasury team. Note that this team is different from a certified public accountant, as it handles daily cash flow management. A CPA generally intervenes at the end of the accounting period and does not manage daily aspects. Alongside the human aspect, cash flow management involves material components. Excel is an excellent tool for monitoring the cash flow of a small business. When it comes to larger companies, however, Excel will quickly reveal its limitations. In this case, opting for treasury management software such as myDiapason is a solid solution.

Effective cash flow management relies on three key pillars.  

Day-to-day cash management

Cash flow management involves maintaining a cash flow statement or monthly cash plan, covering a full year of your company’s activity. Ideally, this should be updated daily and include at least the following information:

• Cash available at the beginning of the month;
• Receipts;
  • Sales
  • Government aid
  • Loans
• Disbursements;
  • Purchases
  • Invoices
  • Accounts payable
  • Salaries
  • Loan repayments 

To simplify cash flow management, using dedicated cash management solution is recommended. By utilizing the appropriate tools, digitizing processes will streamline and automate the treasurer’s daily tasks. This allows the treasurer to focus more on their area of expertise and contribute to creating added value for the corporation.

Key players in cash management 

The treasurer and the accountant are two essential roles involved in overseeing cash management, but they have distinct responsibilities.

Treasurer responsibilities:

• Cash flow management: The treasurer monitors cash inflows and outflows, manages payments, and ensures the company has sufficient cash flow to meet its financial obligations.
• Investments optimization: The treasurer oversees the company’s investments to manage and aims to maximize productivity.
• Budget and cash flow: The treasurer manages the company’s budget to make sure that expenditures align with income.
• Financial risk management: Predicts unforeseen situations to ensure a position of financial stability.

In summary, the treasurer is a key player in the company’s financial management, ensuring smooth operations and secure transactions.

Accountant responsibilities:

• Bookkeeping: The accountant keeps a record of all the company’s financial transactions. This ensures accounts are managed properly and taxes are paid.

• Financial reporting: The accountant prepares detailed financial statements which allow for the company’s financial status to be monitored. 

• Technical aspect: The accountant’s main objective is to manage the accounts and produce financial reports.

The number of key players needed to carry out the roles involved in cash management depends on the size of a company. If the company is small, it’s possible that the accountant or manager alone can be responsible for everything from data collection to cash management.

Whereas for a bigger company, whether medium-sized or much larger, a team of key players is necessary. In this case, the responsibility of cash management is undertaken by a finance department, whose roles are as follows:

Director of corporate finance and treasury

Reporting to the chief financial officer (CFO). Their primary responsibilities include overseeing the company’s cash management, outlining and monitoring the predicted cash flow plan, and participating in the preparation of the cash flow budget. They lead the relationship with banks, manage financial risks, produce and analyze cash and financing indicators, ensure the optimization of cash processes, and maintain the functionality of the Treasury Management System (TMS).

Senior treasurer (or treasury manager)

The senior treasurer is the team’s leader. He oversees all treasury-related activities. Responsibilities include cash management, cash forecasting, negotiating with banks, and implementing financial strategies.

Treasury analyst

Responsible for analyzing cash flows, monitoring bank accounts and foreseeing cash requirements. They work alongside the Senior Treasurer to advance and optimize cash management.

Financial risk manager

Responsible for assessing and managing the risks associated with financing, investment, foreign exchange, interest rate and asset transactions, as well as market fluctuations. This role is essential in protecting the company against potential financial losses.

Cash manager

This role includes handling day-to-day treasury operations, such as making payments, receipts, and transfers between accounts. They ensure that cash is readily available when needed.

Banking relationship manager

Maintains relations with banks and negotiates terms and conditions for the various banking services provided (loans overdrafts etc.). They are also responsible for managing the company’s bank accounts.

Treasury consultant

Responsible for managing the IT tools used for treasury purposes, such as treasury and risk management software (TRMS) and online banking platforms. They ensure financial transactions made are reliable and secure. 

Treasury analyst

The treasury analyst checks financial operations, ensures compliance with internal policies and regulations, and detects any inconsistencies. 

Financial specialist

Responsible for sourcing and negotiating external processes of financing (loans, lines of credit, bond issues, etc.).

Cash flow indicators  

Establishing and monitoring relevant Key Performance Indicators is essential for good cash flow management. Of course, cash flow is an indicator in its own right, but there are other KPIs to be aware of, such as: 

• Net Expenditure: this is calculated as the difference between monthly payments and monthly receipts. Net expenditure is a cash flow monitor for a longer period (monthly). Easy to calculate, the indicator shows whether your cash position is in the green (surplus) or in the red (deficit). 
  

• Cash Burn: In business jargon, the term “capital erosion” is commonly referred to as “cash burn.” Concretely, cash burn represents the amount of money a company spends each month to cover its expenses. More simply, cash burn corresponds to the outflows listed on your cash flow statement.
• Working capital (WC) and Working Capital Requirement (WCR): In addition to calculating cash flow, these two indicators also provide a view of its changing activities or production. Changes in WCR may differ from those in cash flow. This is the case, for example, when a company experiences a boom in its activities. This requires the company to buy more equipment, potentially employ more people, and manage a larger inventory. While this growth is positive for a company, these increases also represent a cost in terms of increased working capital. This will inevitably have an immediate negative impact on short-term cash flow (pending the arrival of revenues) unless the situation has been anticipated with an increased WC.
  

In the absence of robust processes and methods, cash management can quickly become complicated. For smooth and effective management, it is beneficial to be aware of the following best practices:

• Using treasury management software: This type of solution offers more features than a simple Excel file. The treasurer’s work is made easy with this automated system and sophisticated interface, as the process prevents input errors. 
• Daily monitoring: Clear visibility of cash flow contributes to a company’s financial stability, sustainability and overall success. 
• Forecasting: Anticipating is mastering, and even improving a company’s liquidity. Effective anticipation involves creating a forecast at the beginning of the fiscal year and periodically revising it. This allows for accurate cash level projections and ensures a high degree of reliability. For better anticipation, it is advised to make several predictions based on multiple hypotheses, which allows a test of the stability and strength of cash flow.
• Improving payment terms: Some clients have long commercial processes and pay invoices after several weeks or months. This inevitably complicates cash flow management and the interpretation of financial figures. Therefore, maintaining good relationships with your financial partners is essential. It can be useful to raise your clients’ awareness about the importance of timely invoice payments. Conversely, managing accounts payable is central to maintain healthy cash reserves. To find a balance, the company can negotiate longer payment terms with your suppliers. Additionally, automating reminders and controlling your payment flows (reconciliation between your inflows and outflows and the corresponding invoices) through a cash management solution will greatly facilitate the treasurer’s work.
  
• Effective inventory management: Good inventory management is crucial for maintaining healthy cash flow. Stocked products or materials represent a cost. On one hand, inventory requires the purchase or leasing of storage facilities. On the other hand, stored products are not yet sold but are already manufactured and thus paid for by the company. For precise cash management, it is necessary to calculate the total value of inventory through stocktaking regularly. This requires additional work and introduces the risk of errors. It is recommended to limit inventory and maintain a high turnover, which will improve available cash flow.
  

Here is a summary of our cash flow management best practices:

• Deal with outstanding debts and customers in arrears through amicable or legal collection. 
• Mobilize receivables: use bank discounting, factoring or lease back to obtain liquidity. 
• Negotiate payment terms: request payment terms from suppliers. 
• Negotiate overdraft facilities with the bank.
• Propose staggered payment plans to suppliers and negotiate payment deadlines for social security contributions and taxes.

Today’s treasurer plays a central role in a company, needing to anticipate needs and provide proactive solutions to the financial direction.

Diapason simplifies the daily tasks by digitizing every cash flow management process step to support value creation.

myDiapason is a complete treasury management software covering the entire cash management process, including financial flow management, payment flows, and risk management.

This unique and scalable treasury management process addresses the needs of large groups and mid-cap companies. It integrates seamlessly with your Information System and partner platforms, allowing end-to-end management of your treasury.