You often ask us questions about cash flow management and planning. We asked Pavlína Vančurová to answer the questions we most often hear from customers and users of Caflou. Pavlína is a lecturer in economic topics and a consultant in corporate finance, who provides the Caflou Academy with professional guidance and creates its content. 

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Pavlína and cash flow 

As far back as during her time at the university, Pavlína was nicknamed “cash flow” by her students 😎. She taught business economics and emphasized the company’s ability to generate money, not just make book profits. When she announced a change of teacher to the students of the Czech University of Life sciences Prague, Faculty of Engineering in the middle of one semester, one of the students said: “A new cash flow is coming.” She later worked as the managing director of the Czech branch of the international consulting company PNO and had a responsibility for optimizing business processes and economic results. While the economic results were reported to the parent company on a monthly basis, cash flow needed to be addressed on a daily basis. Since the establishment of her own company PADIA, s.r.o., Pavlína has been devoted to managing cash flow professionally as an interim financial director of a number of clients who enrich Pavlína’s experience with the economic side of business every year. The clients praise not only the high level of expertise, but also the intelligibility with which Pavlína can explain complex economic issues. 

For many months, Pavlína has been contributing to the Caflou Academy and helping expand knowledge in the field of cash flow management.

In the interview, Pavlína shares her rich experience with this topic. 

1. What exactly is cash flow management? 

Cash flow management is mainly about systematically ensuring the company’s financing at minimal financial costs. Take, for example, a situation where you want to avoid problems with late payment of liabilities to your suppliers in the future. The instinctive solution encourages you to keep a sufficient reserve of free cash flow in your accounts which can easily cover your liabilities. But how much interest does your bank credit to your company account each month? I don’t assume that the accrued interest reaches the level of inflation. It will be tenths of a percent rather than an interesting percentage. In short, leaving free cash flow in the company’s account does not earn anything. On the contrary, it devalues corporate resources when compared to inflation. On the other hand, not enough money for payment can also bring extra costs, e.g. in the form of penalties, fines for late payment and the like. It follows that:

The company needs the right amount of funds – not too little, but not too much. But what is the “right amount”? You can answer this tricky question thanks to cash flow management. 

Every company approaches economic management differently. For some, profits are crucial, for others it is long-term growth in the value of the company, and someone sees the meaning of business mainly in generating money for the owners. However, no entrepreneur can avoid addressing the issue of a sufficient amount of money. Although economic management of each company is largely unique, there are some common features. The key to a good economic operation of the company is to have clear priorities and be informed about the real financial impact of each company activity in time. It’s not enough to have a rough idea of how much money a sale of a particular product, service or order will bring. It is necessary to know whether the sale will cover the costs of the manufacture of products, to ensure production at variously filled capacity and the very readiness of the company for the production in the form of wages, rents and investments. 

Cash flow management addresses both the time coherence between what I can pay from and what I have to pay, and a factual view of what the company generates money from and where it spends it. 

2. Why manage cash flow at all? 

You may have heard the saying: “Those who do not control are controlled.” I think it also describes the economic management of a company well. It is a matter of systematic planning and determining where to direct the cash flow according to the set priorities. 

Nowadays, entrepreneurs experience a highly unpredictable environment that is changing rapidly and where it is necessary to respond to changes with unprecedented speed. For success in business, the reaction must also be mostly correct, i.e. in accordance with the good long-term economic development of the company. Let me borrow an example from sports. You will certainly encounter a number of forced errors in business. For example, if your customer pays the invoice after the due date and you subsequently have fewer resources for your payments. However, it is wrong to make repeated unforced errors when, for example, you already know that due to the deteriorating payment morale of your clients, you are not getting money and you don’t start building effective reserves and making better use of resources through proper cash flow management. In a highly competitive environment, the winner is the one who makes the least unforced mistakes. 

3. Who should manage cash flow, and for whom cash flow management is not necessary? 

It is an exaggeration to say that every individual who wants to be doing at least as well as today in the future should manage cash flow. 

Those who do not have an overview of their regular income and expenses, of which income and expenses are recurring, which are random, how uncertain the income is in the future, and of which unexpected future events may surprise a tight budget, they don’t manage their finances. Without systematically created reserves, it is not possible to build personal financial well-being. 

It’s similar for a company. If we don’t just look at the amount of extra or insufficient corporate money on a given day, but if we look more closely at the types of income and expenses, distinguishing between regular and influenceable cash flows from investments and credits, we are starting to manage cash flows and can better anticipate what can happen to the company’s treasury in both the near and the distant future. Thanks to this, we will manage the financial resources better, and we can even bring considerable savings to the company. If we start to systematically and actively manage the financial reserve with regard to the risks arising from the cash flow plan, we gain a considerable competitive advantage. 

So, it’s not just about the company’s solvency and ensuring its continued existence. It is also about the impact on profitability, efficiency, rate of return, and thus the meaningfulness of business. So, who is cash flow management not for? For those who don’t want to actively manage their company and don’t consider it important to lead the company to the best possible results. 

4. Are an accountant and accounting not enough for cash flow management? 

A good accountant can play a big role in cash flow management, but the role of accounting in cash flow management is completely different from the role of a company manager. 

You may be surprised, but financial accounting is not much about money. 

There is a “cash” box in the balance sheet, but it only shows the balance of money in the company’s accounts and the company’s treasury as of a certain date. There is a complete lack of information as to why there is more or less money than in the comparable period in the past. As a manager, you need to know if your business is generating more money thanks to a great product and not primarily because you’ve sold some older company equipment or taken out a bank credit. 

Accountants prepare documents that can be used directly for deciding on the company’s activities with greater or lesser success. Imagine that as a company manager, you receive information about profitability every month. Based on the development of economic results, you deduce how prosperous the company is. The final amount of the reported economic result is co-determined by the method of conception and recording of revenues and costs in accounting. Let's say that you instinctively decide, for example, to pay rewards based on the reported good financial results. But you may not have motivated your team to behave as necessary when the economic result was reported poor. Or, it simply did not match the amount of money in the account from which you wanted to send the rewards to your employees. Tracking a financial result that isn’t easy to grasp makes it more difficult for you to manage a company than to help you with it. Ongoing financial management takes place mainly at the level of monitoring working capital, cash flow and tuning of income and expenses (The smart application Caflou can help with this very well. It can show you how you are doing not only overall, but also from the point of view of each customer or project).

5. Can you advise what to do if I have more than enough money? 

The first step is to analyse the surplus money

Why do you have more? Under what circumstances will you need free cash flow again? Can you expect to have more money than needed to cover the business needs in the future? 

When you answer these questions, you are more likely to deal with excess money. 

The first option is to keep the excess money in the current account. This is a variant with maximum liquidity (you can use the money at any time) and at the same time with very low efficiency (negligible interest rates). A term deposit or savings account will bring slightly better interest rates, but usually not high enough to offset the effects of inflation. While the availability of money in case of savings accounts is usually fast, your money in a term deposit account can be inaccessible for several months or even years. You can use occasional surpluses to support sales according to the motto “money must flow”. Or, for example, you can pay invoices sooner and for a lower price when applying a discount, which the supplier uses to try to encourage payment as quickly as possible by offering a discount on your payment before the due date. 

Investing is possible in case of a permanent surplus of money. These can be equity securities or debt securities that even your banker can handle. Although the funds invested in this way are easily available, the question is the profitability achieved, because it fluctuates in the case of securities and the return on originally invested funds is never guaranteed if you need your funds back. As far as a truly permanent surplus is concerned, there is undoubtedly the possibility of achieving a higher appreciation of the company’s free cash flow compared to bank accounts and term deposits. 

6. Can you advise what steps to take if I don’t have enough money? 

What to do if I don’t have enough money is one of the most common questions in cash flow consultations. 

Cash flow management is just about being able to prepare for such a moment and manage the lack of money so that it does not lead to the bankruptcy of the company. 

If short-term deficits in financial resources occur due to asynchronous developments in income and expenses, liquidity provisions can be reversed, business partners can be asked for repayment schedules, bank guarantees and external short-term resources (operating loan, overdraft) can be sought or the credit limit can be increased and income accelerated (e.g. Cashbot, or Roger), as was mentioned in our articles Solving The Lack Of Money and Ways to Improve Cash Flow. We also recommend getting acquainted with the most common mistakes and scenarios that are good to know when managing cash flow, or getting inspired by solutions from case studies

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Article author: Pavlina Vancurova, Ph.D. from  Padia

Ing. Pavlína Vančurová, Ph.D.

In cooperation with Pavlina Vancurova, Ph.D., specialist in business economics from consulting firm PADIA, we have prepared the Caflou cash flow academy for you, the aim of which is to help you expand your knowledge in the field of cash flow management in small and medium-sized companies.

In her practice, Pavlina provides economic advice in the area of financial management and setting up controlling in companies of various fields and sizes. In 2011, she co-founded the consulting company PADIA, where she works as a trainer and interim financial director for a number of clients. She also draws on her experience as the executive director of an international consulting firm. She worked as a university teacher and is the author of a number of professional publications.