Omzet is ijdelheid, winst is mooi maar ….

…it’s all about cash!

Turnover and profit are patient indicators that can be controlled to a certain extent by management. Turnover can be allocated to the wrong periods/years or results can be released prematurely in work in progress or by sending costs by means of reserves. Profit is a (re)flexible concept and can be controlled reporting-technically. Cash, on the other hand, cannot.

Costs and income versus expenses and receipts
To determine cash flows, also called cash flow, it is important to distinguish between two things.
On the one hand, costs and income, to determine profit, and on the other hand, expenses and receipts to determine net cash flow.
A company can make a profit and still have a net negative cash flow.
To determine net cash flows, it is important to distinguish between costs and expenses. Not all costs are also expenses. Depreciation is a cost but not an expense.
A company can make a loss and even have negative equity and still continue to exist as long as the net cash flow is positive.

How does cash find its (re)route in the company
It is important for every entrepreneur to understand how cash is captured or released in the successive business processes. Below are a number of recognizable situations:

• Cash: Some sources include bank financing, accounts receivable factoring, asset leasing, and bank balance;
• Purchasing goods and services for production: opportunities for effective use of cash include negotiating favourable delivery terms and discounts, and establishing relationships with reliable suppliers;
• Inventories and work in progress: cash is easily tied up for too long in this phase. Monitor the turnover rate of inventory. This avoids the risk of obsolete inventory and thus the destruction of cash and the erosion of profitability;
• Monitor sales conditions: be aware of giving non-market conform payment conditions. Ensure timely and complete invoicing of products and services. Monitor the logistics process and the associated internal control measures;
• Accounts receivable management: effective and proactive debtor monitoring is an absolute necessity. Proactively approach your customers with the question whether the goods have been received in good order and whether there are any issues that could prevent payment. Ensure adequate accounts receivable management, in which it is important to immediately approach debtors whose credit term has been exceeded. Agree on payment discounts for early payments or the calculation of interest if the payment term is exceeded;
• Identify early signs of a faltering cash flow bottleneck: Increasing outstanding accounts receivable term in days, inadequate internal control measures, tightened conditions under which suppliers are still willing to deliver their services and products.

The importance of the Cash flow Forecast
A good insight into the cash flows is – especially if the bank balances are limited – an important tool to predict and anticipate peaks and troughs in the cash flows.
A 12-month rolling cash flow forecast prevents unexpected cash shortages and offers an early opportunity to adjust revenues and expenses or can be a reason for proactive consultation with financiers.
A good insight into the cash flows reduces uncertainty and provides more peace of mind for the entrepreneur and the company.

In conclusion
Having sufficient cash is the most important condition for a company to be able to continue to exist. In good times to be able to grow and invest in assets and working capital. In times of recession to be able to continue to meet its obligations to suppliers and banks.
A good insight into future cash flows can make an important contribution to the further growth of the company.

Want to know more?
If you have any questions after reading this article or need support in gaining insight into the cash flows in your company and their management, please feel free to contact The CFO Centre.
You can do so by email [email protected] or by telephone on (035) 3333 555.

Hans Lugard
May 2015

Posted on 13th June 2016