Short-term cash flow planning with open items

Short-term cash flow planning concentrates on the precise monitoring and management of payment flows and liquidity reserves over a period of a few weeks up to a year. This kind of planning helps to avoid financial shortages and creates a solid basis for a stable financial future.

At the centre of it all is open items management. Open items influence a company’s current and future financial position, since they are receivables that have been invoiced but not yet settled. For short-term cash flow planning, the period covered by the payment terms of incoming and outgoing invoices is considered.

The level of open items indicates how the account balance will develop. They show the incoming and outgoing payments to be expected and are therefore an important indication of a company’s liquidity.

Careful management of outstanding payments allows companies to plan effectively and to optimise their cash flow. Analysis makes it possible to spot trends in account balances and to manage liquidity on the basis of expected incoming and outgoing payments.

Short-term cash flow planning with open items

In this 7-minute video we show you how to create precise short-term financial planning with COMMITLY and open items management.

In COMMITLY the rule is: “the plan beats the open items”

The “either-or principle” for forecasts / in the forecast

COMMITLY is an innovative solution that works on the “either-or principle” in the forecast. Either an existing planned value is used or – if no plan exists – the total of the open items is taken as the basis. This principle is re-checked with every change to the plan or every change in the open items. It makes forecasting efficient and flexible and prevents duplicate planning:

If a planned value is stored for a category for a given month, the open items serve as a guide to how far the target has been reached.

An example: Planned for April are +€100. In addition there are open items amounting to +€80, which gives an expected target achievement of 80%.

Next step: make sure that the €80 comes in (open items management) and invoice a further €20 (sales) in order to reach the target in full.

If no planned value exists for a category for the month, the total of the open items falling due is taken over as the forecast value. In this example: the forecast then shows +€80.

Why is the “either-or principle” so valuable here?

Working with defined scenarios allows companies to identify the need to act early and to adjust their strategies accordingly.

Another key advantage of the “either-or principle” lies in the improved accuracy of the predictions, for short-term cash flow planning too. By limiting yourself to the most likely scenarios and comparing them with current data and trends, you can produce realistic forecasts.

That leads to optimised planning and helps to allocate resources more effectively. Instead of taking a multitude of possible scenarios into account and being overwhelmed by too much analysis, the “either-or principle” allows targeted management under clearly defined conditions.

Open items give an early indication of the possible target achievement of the short-term cash flow plan:

Short-term cash flow planning is therefore not only an instrument of financial management, it is an essential part of company strategy. It makes it possible to react proactively and flexibly to changes in the business environment.

That is the perfect transition to medium- and long-term cash flow planning.

Short-term vs. long-term

cash flow planning

To understand a company’s financial control mechanisms, it is important to distinguish between short-term and long-term cash flow planning. Short-term liquidity is geared to the immediate future and includes open items management in order to spot shortages early. Planning for the long run covers a period of more than a year and guides the strategic direction of the company. It covers investment decisions, the raising of equity or debt capital and the development of sustainable liabilities and receivables.

In that case the open items serve less as a basis and more as an indication of future cash flow developments and of the payment behaviour of customers and suppliers. In short-term cash flow planning, by contrast, the focus is on flexibility in dealing with uncertainty and unforeseeable events. In order to be able to react to sudden challenges, dynamic cash flow planning has to be in place for a foreseeable period and has to allow for adjustments.

Unlike short-term cash flow planning, the long-term method is more preventive in character. It aims to prepare the company for the financial challenges of the future and to achieve its strategic goals. Despite these differences, both kinds of planning should be taken into account. The information from short-term cash flow planning – the analysis of open items in particular – provides valuable insights for the long-term strategy. It shows how effectively the company manages short-term receivables, how that affects future financing and how customers’ payment behaviour is developing.