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Tip: Instruments for short-term and long-term Cash flow planning

Tip: Instruments for short-term and long-term Cash flow planning

Instruments Cash flow planning

Cash flow planning or cash flow management is one of the most important tasks of corporate management. The challenges and approaches differ depending on the economic environment, business model, industry and company size. Another key aspect is whether Cash flow planning is managed in the short, medium or long term. In this article, we provide an overview of the resources available to Cash flow planning in the short, medium and long term and the importance of up-to-date data as a basis for Cash flow planning .

 

Short-term Cash flow planning: Payment releases and cash pooling 

 

The short-term Cash flow planning in the horizon of a few days can play an important role in some situations. For companies with fast payment flows (e.g. online trading) or for companies with highly fluctuating expenditure, the daily monitoring of payment approvals at certain times can be important. 

The scarcer the funds available on a daily basis, the more important the short-term component of Cash flow planning becomes.

This is where so-called cash pooling can provide support. The principle of this short-term measure to maintain liquidity is simple: if a company's account balance threatens to slip below zero, the balance is temporarily offset by the positive cash balance of a subsidiary belonging to the company. Cash pooling is essentially practised within companies and groups that have cash balances on distributed accounts that can be balanced out among themselves. In this way, overdraft interest or overdrafts can be avoided.

However, it is not only large corporations that can benefit from this instrument at Cash flow planning . Public institutions, local authorities and state utilities can also use cash pooling to intelligently avoid short-term payment difficulties by channeling free cash to where it is needed. 

However, a modified form of cash pooling can also take place within a company on the basis of reserve accounts (internal cash pooling). If sufficient Cash position has been generated operationally, Cash position that is not absolutely necessary is transferred to a reserve account. If Cash position is needed again, e.g. due to larger supplier payments or investments, it can be transferred from the reserve account back to the operating account.

In the real estate sector, the so-called waterfall method is often used in this context. Here, the main components of rent, operating costs, investments (so-called capex accounts) and debt service are separated into different accounts. If rents are received, they are transferred to the debt service, capex and operating costs accounts. If investments are needed, they are paid from the Capex account.

 

Medium-term Cash flow planning: Check open items (receivables and liabilities)

 

Medium-term Cash flow planning looks at cash and cash equivalents for the next few weeks to a few months. Open item management is of central importance in this area. On the payments side, outstanding receivables in particular should be closely monitored:

  • Which customers have not yet paid? Which invoices are currently open? A list with all open receivables and the payment terms provides an initial overview.
  • What is the probability of invoice default? A statement of receivables with an age structure can help to estimate default risks and to better forecast the payments that can realistically be expected.
  • What payment terms and conditions have been agreed with the current customers? By granting cash discounts or agreeing on instalments and part payments, payments can often be made earlier.

On the payments side, you can optimize Cash flow planning by checking all outstanding invoices. Can you possibly pay suppliers, subcontractors or freelancers later? Can installment payments be agreed in extreme cases? If you actively approach your creditors here, you can often gain decisive advantages.

 

Long-term Cash flow planning: Cash flow optimization as part of the financial strategy

 

If you want to manage your company with a high level of Cash position "high on cash" in the long term, you should make Cash flow planning an integral part of your corporate strategy. All business decisions should be made with a view to the impact on cash and cash equivalents. The aim should be to accelerate the cash conversion cycle.

How does that work?

Have you ever thought about how long it takes for a euro that you have paid out for personnel, material purchases or other expenses to return to you as a deposit? The key figure of the cash conversion cycle calculates precisely this value. The smaller it is, the better your company is positioned in terms of Cash flow planning .

To keep the cash conversion cycle as short as possible, your Cash flow planning can start in three places:

  1. Postpone the timing of disbursements
  2. Shorten storage times - reduce warehouse size
  3. Realise deposits earlier and more regularly

 

Important: Plan with scenarios

 

Scenarios play an important role in Cash flow planning . Experience naturally plays an important role in this context, but should not replace, but rather supplement, calculations. What-if considerations should be calculated regularly, but above all discussed and debated. You should think in all directions:

When can liquidity bottlenecks arise and how do you react?

In order to open up sustainable room for maneuver in all directions at Cash flow planning , you should seek contact with banks and potential lenders at an early stage who can step in in the event of a sudden liquidity gap. It is also best to negotiate the conditions for such bridging measures before a real emergency arises.

How can you retain surplus Cash position or invest it back into the company?

What applies to the worst case should also be planned for the best case. The question for Cash flow planning is then: what to do if a lot of cash accumulates in the long term that is not needed for ongoing business operations? This is where the right investment and cash investment strategies are required. In the case of short-term high liquid funds, internal cash pooling in reserve accounts is a good option, as discussed above.

 

Prerequisite: Current data and the right instruments

 

Regardless of how you want to plan Cash position in the short, medium or long term, the basis for any good planning is reliable and, above all, up-to-date data.

The problems often seem very big:

  • Too few employees in the finance area (or no finance area at all)
  • Accounting is done once a month
  • The evaluation of the tax advisor (business analysis, BWA) comes at the earliest 6 weeks after the end of the month.
  • Open receivables and payables are insufficiently monitored in many companies.

The reasons for these problems are the high complexity of finances and, in some cases, outdated tools - especially in SMEs. This is why Excel is often still used for Cash flow planning . However, filling Excel spreadsheets is time-consuming and prone to errors. Unfortunately, the quality of the forecasts created in Excel is also inadequate.

A total solution for the finance area is tempting, but far too costly. Processes have to be adapted, interfaces defined and employees trained. The great advantage of digitalisation is the possibility of using specialised tools where they are needed and then linking them. This allows you to create your "very own SAP" at a fraction of the cost.

COMMITLY is such a specialized Cash flow planning specialized solution. Connect your bank accounts and start cash flow planning for your company in just a few hours.