Cash Flow Planning

by Daniel Potočnik | Apr 23, 2020 | Blog

Monitoring the Cash Flow using the direct method.

Cash flow planning is a concept that every business owner or CFO needs to know and includes looking at a company’s assets and income over a given period and balancing them with current and future liabilities. It takes into account the goals for the growth of the company, the development of new products and services, and the search for efficiency in their realization. Investors love companies with strong cash flows, where income is reliable and growing and where liabilities are predictable.

A cash flow plan outlines all current and anticipated future needs and goals of the company and provides a greater opportunity for the company to achieve more. In addition, cash flow planning helps determine the return on investment and savings to achieve goals over a given period.

Following the implementation of preventative measures in the organization of work and care for employees, the responsible in the company are faced with the challenge to ensure and continue to generate positive cash flow in the company. The ability to continue to generate positive cash flow even in difficult circumstances allows the company to maintain liquidity, solvency and capital adequacy because without positive cash flow, on the long run, the company ''does not exist anymore ''.

In turbulent times, it is crucial to keep a close eye on your money projections by planning the number of factors such as billing conditions, credit terms, payday loans. By evaluating money stories, the biggest income-generating candidates in a certain amount of money spent by your major cost drivers will dramatically secure the capabilities of organizations.

Regardless of the cash flow planning and design methodology CCH Tagetik software simplifies and automates many types of planning in a single solution while updating and simplifying the process and facilitating collaboration between financial and operational planners.

Companies need to review cash flow and working capital forecasts, prepare profit and loss scenarios, balance sheets and cash flows with varying levels of interruption. Planning for expected receivables and liabilities is just as important as planning for money. Positive cash flow is, however, the main prerequisite for the implementation of other necessary measures to maintain a healthy business and financial core of the company.

The cash flow statement presented under the direct method contains all major cash receipts and payments in the period by source. In other words, it indicates where the cash inflows came from, usually from customers and where the cash outflows went, usually for employee salaries, payments to suppliers, etc. Cash flow planning using the direct method includes the planning of open items (invoices issued and received) and short-term receivables and liabilities.

After all the data from all sources have been collected, the net cash flow from operations is calculated. The direct cash flow planning method assumes cost and revenue planning for which invoices have not been issued/received of yet and allows for the monitoring of their maturities and schedule in cash flow time baskets. The direct method prepares a daily forecast for 4 weeks’ horizon, a weekly forecast for 14 weeks’ horizon, and a monthly forecast for 6 months’ horizon. An indirect method of monitoring and planning cash flow is foreseen to monitor longer forecasts.

In addition, cash flow planning is used to calculate the weekly liquidity ratios (forecasting and monitoring of the actual situation) and to provide an insight into the actual balance of credit liabilities.

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