Cash Flow Management: Definition and Implementation

1. What is Cashflow Management?
2. Here's how you calculate cash flow
3. With these tools, implement cash flow management
4. Cashflow Management – less stress, more security

Especially in economically challenging times with supply shortages, rising raw material prices and unpredictable developments in global trade, it is particularly important for small and medium-sized businesses to keep an eye on their finances. Do you know at any point in time where your income and expenditure stand? Can you estimate what your financial future might look like? And do you know what steps you should take and when?

Important answers to these questions are provided by the Cashflow Management. What this is, how you calculate your cashflow and which tools can support you in this, you will learn in this article.

What is Cashflow Management?

Cashflow is one of the most important Financial ratios of your company and shows the flow of money within a specified accounting period. This means you see exactly how much money has flowed in and how much has flowed out. It differs from company profit in that no fictitious income and expenses are used to determine it, but only payment-effective items are taken into account. A high cash flow makes your company independent from external capital providers as it attests to a high self-financing power. The increased creditworthiness of your company also opens up opportunities for further growth.

Under the term Cashflow Management, the Administration, control and control of all liquid funds in your company are summarised. This is to ensure that you do not run into liquidity bottlenecks. For this reason, cash flow management is also referred to as liquidity management . Part of your cash flow management is the cash flow forecast, with which you can identify possible financial bottlenecks in good time and counteract them. This planning also supports you in recognising whether your company will achieve or miss its business objectives within a defined period of time. Based on these forecasts, you can make investments or apply for loans in good time so that your company does not run into financial difficulties at any time.

Here's how you calculate cash flow

To determine cash flow, you can use two different methods: Indirect calculation and direct calculation. We present both calculation models to you below.

The indirect method

The indirect method for determining cash flow is the most commonly used variant. For this, you first have to collect some key figures and values. These include the annual surplus, the non-payment-effective expenses and the non-payment-effective income.

To the non-payment-effective expenses include:

• Depreciations
• Increases in provisions
• Build-ups of reserves
• Extraordinary expenses
• Reductions in finished and unfinished products

To the non-payment-effective income include:

• Appreciations
• Reductions in reserves
• Extraordinary income
• Increases in inventory
• Reductions in provisions

To determine the cash flow for your company, you now subtract all items that are not effective in payment from your annual surplus:

Cashflow = Annual surplus - non cash-effective income + non cash-effective expenses

The direct method

The direct method represents the simpler way of calculating cash flow. As a basis for this, you need your payment-effective revenues and your payment-effective expenses. However, since the compilation of necessary items takes more time than the figures of the indirect method, the direct method for determining cash flow is less frequently used by companies.

As revenues include

• Payments from customers
• Income from receivables
• Disinvestments
• Equity contributions
• Borrowings

As expenses include

• Salary payments
• Liability payments
• Investments
• Capital withdrawals
• Redemptions of loans
• Rental expenses for buildings
• General operating costs such as water, electricity and gas
• Software subscriptions
• Taxes

If you have this data, subtract the payment-effective expenses from the payment-effective income:

Cashflow = payment-effective revenues - payment-effective expenses

With the aid of liquidity management software or a manual listing, for example in Excel, all payment-effective revenues and expenses can also be broken down in such a way that you can use them for your cash flow forecast. For the preparation of this forecast you can proceed as follows:

1. Write down the opening balance of the first month in which you want to start the calculation. The easiest way to do this is to refer to a value from your balance sheet and, for example, use the cash flow shown in your profit and loss statement as the starting balance in January.
2. Collect all costs and income from the previously mentioned categories and into your table a.
3. Calculate the closing balance of the month. This is also the opening balance of the following month.
4. Continue this until you are at the current month .
5. Now it is time to make estimations for your forecast. For certain costs this will certainly be easier for you than for revenues, which you actually have to estimate. Enter the estimated values into your table and then calculate the closing and opening balances as before.

With these tools, implement cash flow management

In the manual calculation of your cash flows, you will quickly realise that Excel reaches its limits and this work costs you a lot of time. But we have good news for you – it can also be much faster and easier. Using cash flow management software, you can monitor your incoming and outgoing cash flows. The tools automatically prepare these figures for your planning at regular intervals, so that you always have an overview of your cash flow. On OMR Reviews, we have compiled a large selection of cash flow management tools that have been tested and rated by our users. This way, you can easily choose the best software for your company. The software you can find on OMR Reviews includes:

Agicap

Lucanet

Adam

Helu

flowpilot

FinanzGeek

Tidely

Board

COMMITLY

i:control

Using the cash flow management software Agicap as an example, we will now give you a detailed insight into the functions of such a tool.

The software as a service solution allows you to keep an overview of your finances in real time and to make sound financial strategic decisions. You can also centralise and pay collectively invoices from suppliers. Another function is the central tracking of your outgoing invoices as well as the automation of your dunning process.

Agicap offers you all the functions you need for your cash flow management.

Through an integrated bank synchronisation the cash flow management tool can regularly retrieve your account transactions and create a current overview of your financial situation. The retrieved cash flows are automatically categorised.

The manual listing of transactions belongs to the past thanks to Agicap.

Via an API interface, Agicap can also communicate with other billing management and financial service tools. An important function of the tool is the creation of liquidity forecasts. It takes into account payment targets of invoices as well as recurring revenues and expenses. It also allows the influence of opportunities, risks and crises to be included in liquidity planning, so that you receive a reliable forecast for the next 12 months. You can have the cash flow forecast created on a daily, weekly or monthly basis and adapted as required.

Your available liquidity is visible in Agicap at a glance. This way, you can make the right financial decisions for your company at any time.

You can calculate the price for using Agicap individually on the company's website.

Cashflow Management – less stress, more security

Even if you don't have a crystal ball that allows you to look into the future, using cash flow management software can give you a lot of security when planning your finances. Based on past cash flows as well as your receivables and liabilities, it creates an overview of your company's financial situation in real time. This way, you can make the right decision at any time and ensure the long-term survival of your company.