A high percentage of companies go bankrupt due to their permanent state of illiquidity. Illiquidity is not having money to pay the obligations that have expired and that are a priority.
Liquidity does not mean exactly the same as making money. It is possible to obtain benefits and become bankrupt due to lack of cash.
Solvency or liquidity: Companies that have sufficient funds to pay their commitments on time acquire a reputation as solvent firms. Meanwhile, a company unable to meet its obligations as they become due, due to lack of money; it is called insolvent. Solvency must be a primary objective of any company, since an insolvent firm can be forced by its creditors to close its doors.
Controlling cash flow is a method of extreme importance and very easy to carry out that will help us to project future money needs. Its philosophy is based on first determining the income that would be generated in the business in a certain period, and then calculating the expenses and expenses, as well as each and every one of the obligations that are generated due to the development of the same business. or activity, so that when faced with their amounts, they give us a general idea of the money we will have at the end of each period of operations, generally month by month.
For any type of company, the generation of their income will always be given, to a greater extent, by sales, which obviously, some will be cash and others on credit.
When we are selling in cash we will be receiving hard cash against the delivery of the merchandise or service. Meanwhile, when we sell on credit, the values provided to our clients in sales, we will be recovering them in periods of 30, 60, 90 days or more, depending on the agreement reached with the client and the evolution of the recovery of the portfolio by our company.
The above clearly tells us that selling a certain amount in a month does not mean that we are going to have 100% of the money for sales in that same month.
Likewise, the expenses that correspond to our obligations arising from transactions for the purchase of merchandise, some purchased in cash and others on credit, will have the same behavior over time, that is, some merchandise will have to be paid immediately, which It translates an immediate disbursement of money and those that we negotiate in installments, we will also pay in periods of 30, 60, 90 days or more depending on the type of agreement that this time we have reached with our suppliers.
In the control of cash flow, for each of the time intervals, conservative estimates are made regarding future sources of cash (income) and future expenses (expenses). Use low, conservative figures for income and high estimates for expenses. For the initial period (one month, for example), start with the cash you currently have. To this you must add the income and subtract the expenses, which results in cash at the end of the month. The cash at the end of the month becomes the starting cash for the following month.
When starting the preparation of our Cash Flow, we had said that we should think first about income, since if there is no income, we will hardly be able to make disbursements (expenses)
To prepare the cash flow for periods of 3, 6, 9 or 12 months, we must have at hand a series of data that we will achieve by preparing the Projected Budgets.
It is convenient to outline the cash flow in such a way that it is easier to record the required information in an orderly manner and in the same way to be able to project the different values month by month.
Then in a simplified example, I will explain to you through a simple graph, how we can make the mentioned scheme:
La Gloria Warehouse
Cash budget January to March 2012
When you start preparing the Cash Flow, in the month of January, you must place in the first box of January (next balance) the cash and banks that you have at that time and that are not yet committed to pay no obligations.
Then, extracting from the sales budget (which we will see in the next topic) you will take the value of the sales that you consider you will achieve in cash and in the next line the value that you estimate you will recover from the credit sales made in previous periods and that They expire in January.
To advance in an orderly manner, you will fill in each of the boxes until completing the table of the budget that you are preparing.
For the example, there is a box that corresponds to other income, which could well be from loans obtained from the banks or from provisional or definitive contributions from the partners of the company in the period or month in question, which would obviously add to the previous income, to finally get a Total monthly income.
In the same way, we would work with the subject of shopping. From the purchase budget, you would first obtain the obligations that you know you must pay at the time of purchase and later those that you must pay in installments agreed with the suppliers in advance.
Later we would fill the box with other obligations, etc., until completing the Total Expenses.
We deduct the total expenses from the total income, obtaining the value that we would have in cash at the end of the month and which would be the figure with which we would start working the following month, a value that we will locate in the first box of the table (balance to come) corresponding to each month, and in this way, we would obtain a kind of spiral in the records month by month, until achieving the goal, of trying to preset the need for cash that we require to operate our business in a given period.
As you can see, what we will do is project ourselves into the future, that is, anticipate the economic events that we presuppose will occur according to the values obtained in each of our budgets.
As the budgets are nothing more than projections that will help us to shed light on what would happen in the future, we may well realize in advance, the months in which we could have economic difficulties due to a decrease in sales to or due to the extraordinary payment of some projected obligation, allowing us to make prior adjustments to the paper, before we give this document a definitive treatment as a control tool.
La Gloria Warehouse
Cash budget January to March 2012
We continue to fill in the cash sales information, extracted from the sales budget and that we can perfectly accommodate in the cash sales boxes for the months of January, February and March.
Then we go to the “portfolio recovery” information that corresponds to sales made on credit in previous and subsequent months and that have a payment commitment for the months in question. This information is found in the sales budget.
We continue with the rest of the information by projected income, if any, etc., until we finish all the items that are involved in the income group. We total income, but only for the month of January.
We go to the sections that correspond to purchases. As in sales, we started by filling in the information corresponding to cash purchases and that we can fill out in full in each of the boxes corresponding to the months of January, February and March.
We continue with credit purchases, which as in sales, we have to give it a similar treatment, information that we will obtain from the same purchase budget.
We fill out the rest of the items, expenses, other expenses, etc., information that must be contained in a specific Budget of other expenses.
We finished completing expenses and totaled. Then, we establish the difference between the total income for January and the total expenses for the same month, to obtain the available sum with which we would start operations in February. Note that the value at the end of January (sum that passes) coincides with the one that heads the month of February (sum that comes).
The month of February will have the same treatment as the month of January and at the end of the procedure we will obtain a passing amount again, with which we will start the March process (next sum) and so on until the Cash Flow in which we are working.
The cash budget will provide us with the figures that we could achieve for each end of the month and in which a surplus or a deficit can be seen, information that for the person in charge of the financial aspects will give him enough time to coordinate the necessary corrections or either get the necessary resources in a timely manner.
