Enterprise cash flow management

Correctly formed cash flows of the organization indicate its “financial health”, sustainable growth and the achievement of high results in general. Indeed, financial management means finding a balance between the volume of revenues and the use of funds over time. The practical application of the principles of cash flow management (CAP) ensures the organization’s transition to quality economic development.

Some terminology

Cash flows are a collection of receipts and payments of funds from all activities. In the framework of the main activity of the enterprise we are talking about the receipt of revenue and payment of bills, interest on loans, salaries and other taxes. As part of the investment area we are talking about the purchase of fixed assets, intangible assets and the costs associated with their maintenance. The sources and directions of the use of cash flows from financial activities are presented in detail in the table below.

That is, one organization has several cash flows. And they all diversify the results of their activities. The task of each organization is to manage the cash flows of the enterprise, that is, to ensure a budget surplus.

Balanced distribution of funds gives the organization a lot of advantages:

• If we consider the enterprise as an organism, then the flow of funds is a circulatory system that “saturate it with oxygen”. Without money it is impossible to talk about any results.
• If we consider the enterprise as an orchestra, then the flows are the rhythm section on which the operational process depends. Violation of the rhythm leads to the accumulation of stocks, materials, reduced productivity. Under the condition of rhythmic receipts, the organization does not have a need for borrowed funds, or it is significantly reduced. Cash flow management makes it possible to use internal resources for the development of the company.
• The synchronization of flows determines financial stability and ensures the development of the organization. The more efficiently the funds are distributed over time, the faster the organization will achieve strategic goals.
• The more synchronized revenues and expenses, the more solvent the company.
• Stable income accelerates the turnover of capital, reduces the financial cycle, the need for capital. The company is able to extract extra profit.

Cash flow management system

Flow management is carried out by the financial service of the organization, which is responsible for planning. In large organizations, a whole staff of employees can work in the financial department, and in a small one there is enough a financial director and chief accountant. The planning system necessarily includes:

• information support (timely receipt of data from all departments),
• legal framework (legislative acts, local norms and rules);
• financial instruments (cash, investments, taxes, deposits, loans, bills);
• financial methods (settlements with creditors, shareholders, budget).

That is, the management system is the impact of financial methods and tools on the movement of resources in order to achieve strategic goals.

Principles

To manage the cash flows of the enterprise was carried out efficiently, you should adhere to such principles:

• The accuracy of the information. Today it is difficult to create a single information base for all types of organizations. Existing accounting standards provide for the use of different methods for calculating indicators. The system of maintaining the internal control system within the country with international standards is different. To get reliable information, you need to bring different methods to a common denominator.
• Balance All available cash flows must be optimized in terms of volumes, time intervals and other characteristics.
• Efficiency. Cash flows are dispersed over time. Due to the uneven flow of funds, free resources are often formed. If money does not participate in circulation, then they lose value as a result of inflation. To prevent this from happening, you need to manage cash flows as efficiently as possible.
• Liquidity. Uneven income causes a shortage of funds. Therefore, it is important to achieve a balance of positive and negative cash flows.

Algorithm

Cash flow management is carried out in the following sequence:

• management structure planning;
• OODS analysis;
• assessment of cash flow management for the past period;
• the study of factors affecting the formation of funds;
• assessment of the effectiveness of the system;
• flow planning in the context of individual activities;
• providing control over the implementation of the selected management policy.

We plan the structure

To develop a cash flow management model, it is necessary to determine the main objectives of the UDP system. If management understands the extent of the problem, then steps to solve it will be easier. It is necessary to build a system of criteria for evaluating the results, distribute the flows according to their types and find the optimal impact tools. This stage will greatly simplify further analysis, planning and accounting of operations. It is also necessary to identify those responsible for providing information from all departments.

Rating

Analysis of cash flow management is carried out in order to identify the causes of deficit, surplus of funds, sources of their income and directions of use. All these factors determine the solvency of the organization. For this purpose, a direct and indirect method is used. In the first case, we are talking about assessing the liquidity of an enterprise, since inflows (revenue, advances received, etc.) and outflows (payment of bills, repayment of loans, etc.) are studied. That is, the company's revenue is analyzed. The excess of revenues over payments is called an inflow of funds, and the opposite situation is called an outflow. Economists use this method in conjunction with the indirect method, since it is difficult to determine the relationship between flows and financial results using it.

Features of the direct method:

• shows the directions of use of funds;
• reveals the level of solvency;
• establishes the relationship between revenue and profit;
• used to plan future flows;
• facilitates the assessment of liquidity, solvency.

The direct method is usually called the top, as the analysis is carried out from top to bottom of the income statement. The main disadvantage of this method is that with its help it is impossible to determine the relationship of the flow with financial results.

In an indirect analysis, the “Profit and Loss Statement" is studied in the context of individual activities according to the following formula:

DSnach + Receipts - Consumption = DScon.

Method Features:

• reflects the relationship of profit with flows;
• shows the dynamics of own working capital according to the results of activities;
• allows you to determine the amount of income, their sources and directions of use;
• reveals the availability of reserves of funds;
• determines the company's ability to quickly repay its obligations to participate in investment activities.

At the final stage, an analysis of liquidity, indicators of turnover and profitability. The obtained values ​​are compared with industry average.

Factors

The main goal of cash flow management is to allocate funds over time. All causes of flow imbalance are objective and determined by economic factors.

• Market conditions. The issue of securities can cause an influx of funds, and available funds can be directed in the form of investments in stock market instruments. In addition, the organization can receive income from the generated package of securities.
• The need to pay taxes creates an outflow of funds. After all, the established payment schedule does not always coincide with the receipt of monetary resources.
• Commodity loan. This factor causes both an inflow of capital upon receipt of revenue, and an outflow when purchasing raw materials.
• Settlement system. For the convenience of customers, organizations use all possible payment methods: cash, securities, and other documents. The rate of receipt of funds for each instrument is different.
• Loans The receipt of credit forms a positive cash flow, and its repayment - negative.
• Seasonality If the products are seasonal in nature, then cash flows are formed only in certain periods of time. With this method of functioning free residues appear, which are expedient to use as soon as possible. Therefore, cash flow management is of great importance.
• Depreciation deductions. The more intensively the equipment is used, the higher its prime cost.

System performance

Improving the quality of the cash flow management system is possible only after analyzing the collected data. If the cash flow from all types of activities is of positive importance, then we can talk about the solvency of the organization. The negative value of cash flow indicates that the organization relies mainly on borrowed capital. It is necessary to determine the reasons for its formation and eliminate.

After identifying the flaws of the system, a payment calendar is formed that covers all income and expenses for the future period (month, quarter, year). It comes in several forms:

• A share issue calendar can be developed before the Central Bank is sold in the primary market. Then it will contain only one section - “Payments for the preparation of the issue”. If the calendar is formed during the period of sale of the Central Bank, then the section “Proceeds from the issue of shares” should be additionally included in it.
• The debt amortization budget contains information on the repayment schedule of each loan, the amount of the monthly payment and the terms. Banks today offer a variety of products to raise funds: from overdrafts to guarantees. To eliminate cash gaps, it is recommended to use letters of credit.
• High-quality financial management of cash flows is the formation of the financial policy of the organization.

The control

At the final stage, cash flow management methods and a system of their control are developed, that is, measures to verify the implementation of decisions. In the event of changes in external or internal factors that affect UDP, the organization’s policy changes. What should be an effective cash flow management policy?

You can talk about the effectiveness of the system if the receivables, payables and cash are not started and monitored. All of these elements together form an effective UPD system. Key points are:

• A short time interval between receipt of receivables and payment of payables, moreover, in advance of receipt of funds. This ratio of flows allows to reduce the balance of funds in the account of the organization, the most efficient use of internal resources, without resorting to borrowed funds, to reduce the cost of servicing debt.
• Making payments under management control.
• Implementation of factoring transactions.
• Development of a system of discounts for customers who pay for products ahead of schedule.
• Product diversification.

Ineffective is a system in which:

• there are delays in remuneration;
• accounts payable to partners and the state are growing;
• the volume of overdue loans;
• liquidity of assets decreases;
• the duration of the production cycle is stretched due to disruptions in the supply of raw materials.

What do you need to make a forecast?

The company's operations should be planned based on sales or net profit. Let us consider in more detail how to do this.

First you need to calculate the amount of funds received based on the repayment ratio of receivables:

VYRplan = Rnr + (Rk Î KI) + DZn + Apl, where

• VYRplan - the planned amount of revenue from sales;
• PHP - the planned volume of shipments for cash;
• Rk - the planned volume of shipments on credit;
• KI - redemption coefficient of DZ (specific weight of the redeemed DZ in the reporting period);
• DZn - the amount of outstanding DZ payable in a planned manner;
• Av - the planned amount of advance payments.

Next, you need to calculate the planned amount of expenses:

RSp = Ozp + Nf + Np - An, where:

• RSp - the planned amount of costs for operating activities;
• - the sum of the costs of production;
• - the amount of taxes and fees paid at the expense of receipts;
• NP - the planned amount of taxes on profits;
• Ap is the planned depreciation amount.

Based on the terms of payment of taxes, a schedule of payments is formed.

The planned amount of tax payments is formed as follows:

= (Gross profit / tax rate) + Other taxes for the current period.

Cash flow management is a comparison of revenue and costs and finding ways to create a budget surplus.

ODDS

A key element of the organization’s cash flow management is the generation of a Cash Flow Statement (ODDS) Form No. 4. It can be used to determine the volume and composition of assets (the assets for which financial flows will be considered) are taken and the level of receipts and outflows is checked. associated with financial flows. The results of the analysis are considered in conjunction with the analysis of other reporting forms.

Since different financial indicators are formed for different reporting users, the cash flow management model is based on quality indicators.

• Solvency = (DS start + Cash inflow for the period) / Cash outflow for the period = Cash inflow / Cash outflow.

The first coefficient shows whether the organization will be able to repay liabilities due to the balance of funds and current income. Recommended value is greater than 1.

• Self-financing interval = (DS + Short-term investments + Short-term DZ) / Average daily expense.
• Average daily expense = (Cost of sales + Selling expenses + Administrative expenses - Depreciation) / Number of days in a period of time.
• Beaver ratio = (Net income + Depreciation) / All liabilities.

The solvent organization of the coefficient will be in the range of 0.4-0.45.

• Liabilities coverage ratio = (PP + Depreciation) / Short-term liabilities.
• Interest coverage = Net cash flow before taxes / Amount of taxes.

Using this ratio, you can determine whether the organization is able to repay interest through the NDP without violating obligations to partners. Very often, report No. 2 shows the profit exceeding the amount of interest on the loan, however, the company cannot pay the costs of borrowed funds due to negative PPP.

• Self-financing potential = NRTC / Long-term debt.

The organization’s ability to pay dividends in a timely manner can be determined by holding a report on the results of financial and economic activities and calculating the coverage ratio for all types of shares:

• KP1 = PPHT after tax / Total dividends to ordinary / preferred shares.

If the PPP for ordinary activities varies greatly, then economists are calculating a plan for future payments. Liquidity ratios may be underestimated. This indicates that. that the organization depends on external revenues, the organization’s cash flow management model should be based on debt maturities. If over the next year the overdue debt does not increase. Since PPP will show steady growth, we can talk about achieving a level of self-financing. This is how a company's cash flow is managed.

Investment efficiency

These ratios show the organization’s ability to cover costs on its own. They should be analyzed in dynamics, since in different periods the coefficients change.

• Coef. reinvestment = FDM / FDP.

If the value of the indicator significantly exceeds 0, then the outflow of funds is covered by the attraction of external investments. If the company does not use external investments, then the coefficient will be 0. In this case, you can calculate the degree of coverage of investments:

• Degree = NPV / Amount of investment.

If the ability to invest depends on a reduction in previous investments, for example, equipment sales, then the net indicator is calculated:

• I-net = PDA * Degree of coverage.

All this is useful to know when studying a cash flow management scheme.