The summarized scene of the company that we will present below is a simple imaginary reference where the focus on controlling figures, indicators and financial results has ignored the monitoring of one of the Financial Statements, which, in the opinion of some authors, is one if not the most important of all: Cash Flow (COF). Here is the specific capture of one of the moments of the company “B-inte20”:

Chronicle of a bankruptcy

It’s 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 about various company topics and one or another. comment on the national agenda.

The initial focus is on financial results. As is customary, the finance team brings to the table their biweekly monitoring of the Profit and Loss Statement (P&L), indicating in bold and in a larger font size than the rest of the figures the Net Profit which, for Fortune at the head of the table, and therefore for the rest of the guests, shows a marked black color that shows the positive results that are projected for the end of the month.

The review of the P&L is always done from the bottom up , so if the result of the Net Profit is positive, the support time of the financial team is reduced and that’s it, with a quick review of the rest of the numbers and a sweep that show that the Balance Sheet is square, your intervention is concluded. Everyone smiles and gives way to reviewing 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 a topic that is too “heavy” and there is no desire to clutter the management team with figures that divert attention from what is relevant to the business.

The previous 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 little care given to the numbers, the almost sole focus on the Profit and Loss Statement is even more worrying.  It is not bad to review the P&L, but it cannot be the only decision guide. Many companies have trusted their financial decisions only in the P&L and have found themselves with the unpleasant surprise of having to assume drastic changes with massive restructuring, high-cost debt, sales at a loss and, what is even worse, bankruptcy. They have forgotten the signals left by the combined analysis between Balance Sheet and P&L and when they wanted to react, it was too late.

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 brothers who have very specific guidelines, and in some cases they are only photos of a moment, the FdC is versatile, dynamic and capable of providing key tools for decision making in different temporalities: weekly, biweekly, quarterly or annually. .

Thanks to the proper construction and reading of the FdC, the main lines of the P&L and Balance Sheet are contemplated that, applied to a habit of constant control, projections and involvement of business variables, can lead to early warnings about what the company should do and what it is more relevant, how it should be projected in different future scenarios.

The relevance of the FdC does not only lie in how the company is analyzed internally , it is also an external reference that tells companies seeking to establish a financial/business relationship or those who are going to finance it, whether the management has been adequate or If, on the contrary, it shows significant inattention that could lead to serious difficulties in basic maintenance of the company’s existence.

When adequate management of the FoC is achieved, some points can be anticipated or better managed, such as:

1. Relationship with third parties

Demonstrate financial health, that resource outflows are well covered by inflows and that the asset and liability bases that underpin the operation are solid. It will be very difficult for a Bank to demonstrate a negative FdC from its initial items and whose projection does not show a recovery trend to be encouraged to support 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 view of the real state of the company, giving it more dynamism and allowing the Operating Flow, Financing Flow and Investment Flow to be covered.

3. Advance financing

Ideal tool to organize resource needs at reasonable costs (Credit, Confirming or Factoring) or see intelligent alternatives for managing these (offer Prompt Payment Discount, for example).

4. Resource control

Do we need to produce more? When you have adequate control of resources, you know if you need to produce more or if the current and projected inventories can support the operation. Without adequate flow control, you can be overexecuted or, on the contrary, fall very short on the fly.

It is not feasible to leave control of the FdC to a heavy tool that does not accompany the dynamism of the company  and that therefore ends up assuming average variables to carry out control. The efforts and automations that are in fashion now more than ever in all markets must include the digitization of the FoC. By organizing the inputs, outputs, projections and control periodicity, the bases will be determined that will serve as a roadmap to be able to have a global, structured monitoring tool that accompanies the management committees of any organization.

If we are looking for an instrument that helps us harmonize and control our company’s numbers, Cash Flow is called to take a leading position (be careful, not the only one). Otherwise,  we will be missing the signals that the numbers, from their inert and spectator nature, silently shout at us,  but that, without a critical look and adequate automation, will end up showing us the irreversible facts, in some cases final outcomes for companies. that we manage.

It’s Tuesday again at B-inte20, this time the financial team anticipated it and anxiously waits for everyone in the boardroom.  The session begins and on this occasion the Net Profit is dressed in a worrying red: The projections do not look favorable , 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 come out before the Bank), the product team intervenes with concern informing that inventory has accumulated significantly.

The Committee panics, it is decided to postpone the presentation of the rest of the areas and it is requested to pay urgent attention to financial performance and the implications for the business.  A review of the Financial Statements is urgently needed, however, the Cash Flow is still under construction, no greater attention had been paid to this point and its preparation and understanding has taken longer than expected . Difficult times are coming for a B-inte20 that, on the fly, is evidencing the impacts through partial and manual analyses. The signs were visible to everyone, however, the study was too “heavy”.