The importance of cash flow as a management tool

The Cash Flow is a report that visualizes the difference between a company's receipts and payments. It is an essential tool in any investment project, as it allows access at a glance to the current financial situation and to plan the short, medium, and long term.

It is essential to have a clear difference between income and expenses and receipts and payments, as well as the importance of maintaining the balance between employment and resources and payment and collection times. You can expand information about the short cycle

It is known that "cash is king", but some inexperienced managers only remember cash flow when cash reserves are low. Mistake!

Problems with cash flows not only prevent you from meeting growth objectives and commitments but also jeopardize your project. Despite its seriousness, it is a fairly common problem. The problem is not receiving a payment, it's when. If it's irregular, it's stressful for managers, as its consequences can involve delays in paying salaries and bills, or even stagnating growth by not being able to acquire new clients.

Common Mistakes

• They don't set the price of the product or service properly: they don't calculate their costs (administration, sales...) and profit margin well.
• They prioritize sales over receipts.
• They do not adapt to market changes.
• They don't worry about coordinating supplier payments with receipts.
• They don't have protocols in case of crisis or haven't studied solutions in advance.

To avoid this experience, it is advisable to anticipate events and plan the company's finances in advance.

Initial Tips

Seek financing before you need it

If you spend most of your time at work trying to match outgoing payments with incoming payments, you'll hardly have time to devote to important business operations. Your time is your most valuable resource, and it's better to invest it in business growth and management than in solving a cash flow crisis.

If you have enough working capital to handle cash flow fluctuations, you'll focus on other priorities, regardless of the company's size.

Also, by being prepared in advance, you can negotiate from a very different position. Buying a financial product during a crisis or when the company is in a vulnerable situation usually doesn't end well, as some lenders take advantage of such situations to offer confusing terms or contracts with hidden fees. It's important to spend time researching a financial product that meets your company's needs, reading the fine print so that the cost of financing doesn't increase exponentially unexpectedly.

Consider the ROI (Return on Investment) of financing, not just the costs

Financing is almost always a better alternative than delaying salary payments or turning down business. Apply the following formula to each of your alternatives, and you'll find it much easier to make a decision.

ROI = (Profit - Investment) / Investment

Plan ahead proactively by researching different options and considering ROI

How to Achieve Effective Cash Flow Management?

You must ensure that the company has policies capable of managing payment processes, ensuring the necessary resources, and leveraging available cash. This way, you can use the capital for longer periods and perhaps partially finance yourself with the money held by suppliers.

Improve your company's financial control with the following tips, while benefiting the relationship with suppliers:

Reduce unnecessary expenses

Identify and analyze the company's expenses in detail: you'll find some that you can do without or reduce.

Optimize your payments

• Choose a fixed day of the month to make payments:
  • It will be easier to control that the available funds are sufficient to meet the commitments.
  • Taking into account this date, i.e., controlling your customers' average collection period, will facilitate negotiating the payment period with your suppliers.

Although it's convenient to delay invoice payments as much as possible to get more days of supplier financing, it's important to establish a relationship of trust. At the beginning of the business relationship, you'll probably have to adapt to a deadline that doesn't suit you much, but as you demonstrate the seriousness of your business, you'll be able to increase these deadlines.

• Avoid cash payments: It can generate cash flow tensions unless you have good compensation in return.
• Pay on the due date: Take advantage of the time your suppliers give you to pay, but without exceeding the established date. This way, you'll have more time to get the necessary money. Payments should not be postponed regularly, only as an exception, as you need your supplier's trust.

Offer discounts to your suppliers and take advantage of those offered by yours to increase profitability

• It's common to offer a discount of approximately 2% to suppliers if they pay invoices before their due date. Not all of them will take advantage of it, but at least some will pay much faster. Still, they will have control over your cash flow, which is a disadvantage.
• Take advantage of the prompt payment discounts offered by your trusted suppliers. Although we have just advised delaying invoice payments as much as possible, if sufficient funds are available, it's advisable to take advantage of the prompt payment discount to increase profitability without any risk.

To reach optimal agreements, negotiation is essential, developing a relationship of trust and frankness with suppliers and customers.

Remember that although your goal is to increase payment times, suppliers aim to reduce them.

Contract financial products: factoring, confirming, or a line of credit can get you out of many predicaments

- Line of credit: It's a source of cash or financial cushion available for when needed, such as a cash flow drop or expansion opportunity. - Factoring: Factoring is a financing service in which a company assigns its invoices and/or promissory notes to another company that manages their collection and advances their amount. It's generally cheaper than a line of credit. Crowdfactoring is a collective factoring, which is what we do at Inversa. Instead of a bank advancing the invoices and managing the collection, Inversa handles the management, but investors advance the invoice amount, earning a return in exchange, without paying any commission. - Confirming: It's a financial service for managing supplier payments with the possibility of early payment. It can be used even if cash flow tensions are anticipated, it offers payment guarantees, and is useful for adjusting deadlines to maintain good relationships with important suppliers. You can expand information on invoice financing, as there are different methods: factoring is not the same as invoice advance and commercial discount. To conclude, we must remember how important it is to analyze the cost of the different options to be evaluated in detail, as well as the opportunity costs or the cost of not taking any action. In addition, we reiterate that this study should be carried out before facing a crisis or any cash flow problem. This way, we will avoid hidden costs, problems with the fine print, or contracts with longer maturities than originally sought.