The summarized scene of the company that we will present below is a simple imaginary reference where the focus on the control of figures, indicators and financial results has ignored the monitoring of one of the Financial Statements, which, according to some authors, is one if not the most important of all: the Cash Flow (CF). Here is a snapshot of one of the moments of the company "B-inte20":
Chronicle of a bankruptcy
It is committee Tuesday and at B-inte20 the entire management team meets to review how the company is progressing, understand and validate the proposals of each department and save a few final minutes for healthy, relaxed conversation on various company topics and the occasional comment on the national agenda.
The initial focus is on financial results. As usual, the finance team brings to the table the biweekly monitoring of the Profit and Loss Statement (P&L), highlighting in bold and in a larger font size than the rest of the figures the Net Income, which, to the good fortune of the head of the table, and therefore for the rest of the guests, shows a marked black color that evidences the positive results projected for the end of the month.
The P&L is always reviewed from the bottom up.If the Net Income result is positive, the financial team's support time is reduced and, with a quick review of the rest of the numbers and a sweep that shows that the Balance Sheet is square, their intervention is concluded. Everyone smiles and gives way to a review of the rest of the areas. The numbers look solid and therefore the company is "flying". This is the only space in which the company's numbers are reviewed; it is considered too "heavy" a topic and the management team does not want to be crammed with figures that divert attention from what is relevant to the business.
The above scene can easily be the X-ray of the Executive Committee of several companies: large, small and from different sectors. Beyond the alarming evidence of the lack of care given to the numbers, the almost sole focus on the Profit and Loss Statement is even more worrisome. It is not wrong to review the P&L, but it cannot be the only decision guide. Many companies have relied on the P&L alone for their financial decisions and have been unpleasantly surprised to have to take drastic turns with massive restructurings, high-cost indebtedness, loss-making sales and, even worse, bankruptcy. They have forgotten the signals provided by the combined analysis of the balance sheet and P&L, and when they wanted to react, it was too late.
The Cash Flow, more than the mathematical compound of additions and subtractions, is the most powerful strategic ally of the company's Financial Statements. Unlike its siblings that have very specific orientations, and in some cases are only snapshots of a moment, the Cash Flow is versatile, dynamic and capable of providing key tools for decision making in different timeframes: weekly, biweekly, quarterly or annual.
Thanks to the proper construction and reading of the FdC, the main lines of the P&L and Balance Sheet are contemplated which, when applied to a habit of constant control, projections and involvement of business variables, can result in early warnings about what the company should do and, what is more relevant, how it should project itself in the face of different future scenarios.
The relevance of the ToC lies not only in how the company is analyzed internallyis also an external reference that tells companies seeking to enter into a financial/business relationship or those who are going to finance it, if the management has been adequate or if, on the contrary, there is evidence of significant neglect that could lead to serious difficulties in the basic maintenance of the company's existence.
When an adequate management of the FdC is achieved, it is possible to anticipate or better manage some points, such as:
Relationship with third parties
Demonstrate financial health, that the outflows of resources are well covered by the inflows and that the asset and liability bases underpinning the operation are solid. It will be very difficult for a Bank with a negative FdC from its initial items and whose projection does not show a recovery trend to be encouraged to accompany the financing of projects.
2. Two for one
The FdC allows taking variables from the P&L and Balance Sheet to give a much more complete visual of the real state of the company giving it more dynamism and allowing to cover the Operating Cash Flow, Financing Cash Flow and Investment Cash Flow.
3. Financingantic ionipada
Ideal tool to organize the needs of resources at reasonable costs (Credit, Confirming or Factoring) or to see intelligent alternatives of administration of these (offering Prompt Payment Discount, for example).
4. Resource control
Is more production needed? When you have an adequate control of resources, you know if you need to produce more or if the current and projected inventories can support the operation. Without proper flow control, you may be over- or under-executed as you go along.
It is unfeasible to leave the control of the FdC to a heavy tool that does not accompany the company's dynamism. and therefore end up assuming average variables for control purposes. The efforts and automations that are now more than ever in vogue in all markets must include the digitalization of the FdC. By organizing the inputs, outputs, projections and control periodicity, the bases will be determined that will serve as a roadmap to be able to count on a global monitoring tool, structured and accompanying the management committees of any organization.
If we are looking for an instrument that helps us to harmonize and control our company's numbers, Cash Flow is the one called to take a leading position (not the only one, mind you). Otherwise, we will be missing the signals that numbers, from their inert and spectator nature, silently shout at us, but which, without a critical eye and adequate automation, will end up showing us the irreversible facts, in some cases the final outcome for the companies we manage.
It's Tuesday again at B-inte20, this time the finance team is early and anxiously awaiting everyone in the boardroom. The session begins and this time Net Income is in a worrisome red: Projections do not look favorable.In addition, urgent resources are required to respond to suppliers, the need to manage last minute debt is exposed (unfortunately at very high financial costs and depending on how the results of the financial health analysis with the Bank turn out), the product team intervenes with concern informing that inventory has accumulated significantly.
The Committee panicked, decided to postpone the presentation of the remaining areas and asked to pay urgent attention to the financial performance and implications for the business. A review of the financial statements is urgently needed, however, the cash flow statement is still under construction, no major attention had been paid to this point and the elaboration and understanding of it has taken longer than expected.. Difficult times are coming for a B-inte20 that, on the fly, is showing the impacts of partial and manual analysis. The signs were there for all to see, but the study was too "heavy".
