The cash flow is the main component of the Company's operations and an important factor for financial analysis and strategic planning. Every business has the purpose of earning money (which automatically means - Company development, welfare of employees and satisfaction of owners' ambitions). It is difficult to imagine that some kind of business was formed to produce a particular product, and whatever it happened around it, he continued to produce this product. Obviously, such a business will end when the money runs out of its owner.
Therefore, earning money is the main objective of the existence of a business.
If the business earns money (it is profitable) and does not make any unreasonable expenses (such as withdrawal of funds for another direction, ill-conceived investments into a project, etc.) then the financial flow will not "dry up" and will fill the financial "blood" with all arteries and capillaries of business (it refers to supply, transportation, pay, taxes and other expenses accompanying business activities). This can be compared with the oxygen coming from contractors, gets into accounts and exhales / is spent in the form of payment for the necessary items / articles of expenditure for existence. And thanks to this respiratory process, the business organism lives and develops. And, as you know, with insufficient oxygen supply to the body, asphyxiation and oxygen starvation develops (in the case of business, it slows down, and in the management panic mood prevails and chaotic spontaneous decisions are taken).
The analysis of cash flow (cash flow) enables, with the help of calculations and certain mental work, to determine the nearest future of the organization, namely: where will the enterprise be tomorrow (next quarter, year). It is this type of analysis, mainly used by credit analysts in banks, in determining the future solvency of the client and his ability to return the borrowed funds.
For example, a cash flow analysis gives you an opportunity to learn about:
- Sufficiency of financial resources in business for achievement of planned indicators;
- Possibility / impossibility of self-financing of certain projects or the need for external borrowings at moments of peak payments;
- Business ability to fulfill its own financial obligations;
- Volume and sources of funds receipt and their spending. Structural analysis;
- Business season and its critical moments ("cash breaks").
As a rule, most entrepreneurs and managers use the most primitive and "obvious" ways to correct the financial flow, namely:
- cutting costs (often mimicking turbulent activity that does not lead to noticeable results, because otherwise you can, in the process, accidentally get on yourself);
- getting loans or loans to block the "minus" (in the hope that later on it will "unwind and collapse").
With regard to cost cutting, it often takes a completely perverted outline, when it reduces the cost of labor at the expense of the staff creating the product by reducing or delaying pay, thereby exacerbating the problem and striking out the future of the Company and loyalty to it. Therefore, the issue of cutting costs requires a very detailed and scrupulous study, so that "the water does not spill the baby."
In general, it is most effective to work with operational inflow of funds and its increase, that is, that it can grow almost infinitely (the ceiling is limited only by its own ambitions and, sometimes, by productive capacity) rather than with costs that have a limited resource for dealing with them ( costs can almost never be reduced without losing the quality of the product or the loyalty of employees).
Regarding loans or loans, managers often forget that the "cash gap" is not really a reason, but a consequence of false management decisions. And if these mistakes are not fixed, then situational borrowing and injection will only lead to temporary imaginary relief, postponing the disaster for a while. At the same time, bringing it closer to inevitability. Without a parallel exclusion of factors that led to a "cash-break", it simply increases credit risks and does not solve absolutely any problems.
In fact, a reduction in cash flow in business is the first clear sign that something is wrong. And here it is not even about any criminal acts (theft or financial abuse), but rather about ideological things and strategic mistakes. Gradual drying up of the "financial flow" should point to miscalculations and the wrong choice of ways of development.
Yuri Buzikevych • InBridge Consulting partner