What it is, what it is for and how to apply on a daily basis

Whatever the time, the problem is repeated: over the years, several surveys have pointed out that many companies close not for lack of revenues, but due to financial management problems. In other words, have a cash flow Healthy is as important as sales and profit for a business.

If my company makes a profit, why is my cashier always in the negative? This question is very common, and demonstrates the difficulty that exists in the financial control of many enterprises, as Waldir Lara Júnior, accountant and founder of Larafy Consultoria notes.

“Often, the activity is profitable, but too long a financial cycle will make the company need money from third parties. Depending on the values, this can consume the whole margin, ”warns the accountant.

Thinking about the importance of the theme, Infoomoney has prepared this guide to explain what is cash flow, how to structure it, and how important it is to the financial management of companies. Keep reading and learn more!

What is cash flow?

Cash flow is nothing more than registration of all business entries and outputs for a certain period.

In analyzing these records, the company can understand if financial management is efficient and anticipating a number of problems that could happen in the future, as Lara explains.

“Working capital issues or poorly designed financing, for example, can cause serious financial problems. Often, the businessman sins for not paying attention to the cash flow, but he has to understand that the tool is not an accountant thing, it is for himself to take care of the business, ”he warns.

Cash Flow Components

Everything that represents the company’s financial movements make up the cash flow.

Revenue with products sales and service provision, joint contributions, third party amounts to turnaround are examples of inputs. On the way out of exits are spending on energy, water, internet, rent, payroll, insurance, taxes and other disbursements necessary to maintain the operation.

Here, there is an important warning: even if a certain entry or exit is not your responsibility, the financial person responsible needs to know its value.

“I’ve heard from many customers: ‘I’m not an accountant, I don’t know how much tax paid’. But the company has an obligation to know how much it paid. If the collection is right or not, it is another story, it is worth a study apart if applicable, ”says Waldir Lara.

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Importance of cash flow for companies

Regardless of size, partner’s expertise, industry or any other variable, having a thorough control of everything that comes in and out of cash is critical to the success of a company.

In practice, a well -structured cash flow can bring the following benefits:

Avoid financial problems

With the monitoring of all revenues and expenses, it is easier to take corrective measures if, eventually, the expenses exceed the amounts received.

“Depending on the complexity of the operation, it can give some job assembling the cash flow, but doing your analysis is simple. Looking at these records, the financial can assess whether the expenses were intelligent, or if they need to be resized, ”explains Lara.

Manage seasonality

In some sectors, it is common to be seasonality at certain times of the year. The most classic case is retail, which concentrates the highest sales volume on specific dates, such as Christmas, Mother’s Day, Children’s Day and Easter, for example. Already in the summer months, the movement of stores and supermarkets usually fall considerably in cities that are not touristy.

In these situations, to compensate for the drop in revenues and ensure the stability of the operation, companies need reserves. And this is where another important role of cash flow comes in, which is to help financial management program for these oscillations.

Improve profit margins

Financial management is directly related to operational efficiency and, consequently, to profitability.

In this sense, cash flow helps identify unnecessary costs or that can be reduced in the operation. The same goes for recipes: certain higher margin items can be worth more sales effort over others, for example.

Draw strategies for the business

By clearly seeing the company’s financial situation, managers are able to develop strategies. It is possible to estimate how long it will be necessary to purchase a particular machine, expand the factory, develop a new product or any other type of investment without compromising the cashier.

How to calculate the cash flow?

Here, it is important to make a differentiation between the types of cash flow. One is the Cash Flow Demonstration (DFC), which is mandatory for some companies, as well as the Balance Sheet, the Exercise Result Demonstration (DRE) and other accounting parts.

The focus of this guide is not the DFC, but the financial cash flow. This is not intended to meet accounting standards, but to be a tool for business financial management – and this tool can be quite simple, as Waldir Lara explains.

“The form of calculation will depend on the complexity of each business. In practice, the main difficulty I realize in companies is to be able to look at the rearview mirror. Basically, what managers seek is to identify spending and understand tickets – what is recipe and what is third party money in operation. ”

Briefly, we can talk about three types -oriented types, each with one goal: assessment of the present moment, estimated inputs and future outputs and analysis of the value of money in time. Follow.

Simple box flow

This model relates all its company’s expenses and revenues in a certain period.

This can be done in many ways, such as daily or weekly notes of everything that comes in and out of the cashier, always compared to the previous closure value. Thus, the manager can identify the company’s financial movements in everyday life.

Projected cash flow

Based on the previous model, it is possible to design a cash flow to anticipate future needs. As we have seen, this is important to cover possible business seasonality and strategic investment decisions.

In addition to the financial data for previous periods, projected cash flow considers variables such as inflation, interest estimation, default rates and others that can impact the business in the future.

Discounted cash flow

Often, the manager needs to make decisions involving investments and long -term projects, and discounted cash flow helps in this purpose.

This tool makes a cash flow projection for each alternative to be evaluated. Soon after, it brings these cash flows at present value by applying a discount rate, which represents the expected minimum return to compensate for the risk of investment.

Basically, the discounted cash flow shows the value of money over time. By analyzing it, the manager can visualize what are the best alternatives for the company in the long run and which ones should avoid.

Software for Financial Management

There are many tools on the market focused on financial management. For Waldir Lara, one of the best options is American Cash Flow software, due to the focus of its structure.

“In business finances, Americans think more about the operation itself than in the tax part, and Cash Flow reflects this philosophy well. From the company’s history, this software outlines spending and revenue, and issues alerts when you get close or exceed any of these lines, ”explains the accountant.

Cash Flow is paid, and compiles information in real time as it is connected with banks, suppliers and accounts receivable. “This is one of the software I indicate, because it brings a lot of insights to the business,” Lara adds.

Main challenges of financial management

When it comes to cash flow efficiency, the financial cycle is still one of the main challenges of managers.

Financial cycle is the time that takes between suppliers’ payment and effective receipt of sales. The ideal situation is to have a negative financial cycle (when receiving before paying) or at least very short. Otherwise, it will be necessary to resort to the working capital of third parties, which may be expensive, depending on the company’s risk profile.

To prevent the financial cost from absorbing the margin of the business, it is always important to try to negotiate deadlines.

Another aspect pointed out by Lara is the unpreparedness of some managers regarding technology. At first glance, this may not seem so relevant, but it ends up hindering financial management in many situations.

“Many entrepreneurs totally neglect technology. They do not invest in software or the qualification of employees. It is important to understand that the financial manager does not only exist to assemble spreadsheets and present them at the end of the month, as it is critical to analyzing the data and helping in the company’s strategy, ”he warns.

Good cash flow management practices

Good financial management should have enough cash to face operation and future projects.

In this sense, Waldir Lara draws attention to the importance of liquidity levels. Often money is within the company, but not in the circulating form.

“Equalizing the financial cycle is very important, but it is not the only challenge of financial management. Maintaining very high stocks is also a problem, as I cast capital and can cost expensive, ”he notes.

In sectors exposed to the international market, adopt They also help maintain financial health. Those who export or import can guarantee the value of the dollar, euro or other currency with exchange and derivatives, for example. These operations avoid scares as they guarantee the exchange rate when receiving or paying in foreign currencies.

Finally, it is essential to maintain consistency in the Cash Flow Monitoringand the ideal periodicity is monthly, according to Waldir Lara.

“It has become the month, you have to immediately look at your cash flow. So you will have enough time to promote operation adjustments if necessary, without compromising your result, ”he says.