3. Cash flow

Chapter 3



by: josavere

In finance, the cash flow tool is a very powerful one. Based on the number analysis it offers an excellent aid for us to correctly deduct in projections, where it acquires its true reach as a mechanism for decision making.

In terms of mathematics, its preparation is extremely simple, it is reduced to adding and subtracting complemented with other simple calculations. In practice, it is obtained when the company develops a method of projections with all the difficulties and uncertainty that appear, beginning by the discipline that is required from all of the executive equipment and especially by the group that is in charge of the investment decisions and the computers of the cost.

The ideal is to achieve the best approximation in the estimation of future income and achieve discipline in the programming of disbursements, seeking that all of them become facilitators of the expected income and of others to be generated in the medium and long term to improve liquidity. This, in turn, gives a great advantage to achieving profitability to the extent that it is combined with efficient administration, which produces more liquidity, catapulting the potential to generate value. It also represents the best financial indicator, the basis for meeting all the company's commitments, starting with its operation.

As the cash flow is projected is when it serves, because it has a praline-of-sight approach and it allows a dynamics that is due to the periodical feedback in agreement with the control cycles which depend on the type of company. A supermarket or a bank, for example, needs daily control, a distributor of cars can work quarterly. Everything depends on the operative cycle of the business.

Nowadays, with the spreadsheet or by means of programming in Excel the operative part is very easy. The true difficulty appears in its elaboration and when you have to discipline all of the organization, make them understand that the cash flow is the true measurement of the liquidity and that its projection becomes a directive that demands much application to obtain all the benefits which can be achieved.

In summary, we can conclude that in order to make a cash flow process done correctly, it is necessary to plan. Let's remember that in the long run, the long term is a sum of short terms, framing in a responsible policy, thinking about the long term company (indefinite life unless the opposite says itself specifically). 


a. To project a new business, to evaluate it, and to make the decision of whether or not it should be taken.

b. To evaluate projects.

c. To have clarity about the liquidity of the company.

d. To study financing alternatives, especially of temporary type, while the company generates cash through the operation.

e. To analyze if capitalization is required.

f. To detect a possible investment option in liquid assets, which would or could make us lose yield.

g. To study a possible extension of plant or to analyze alternatives of investment in other fronts.

h. To define a payment of a dividend or a profit distribution.

i. To value a company in operation.

j. To look for alternatives in case of a crisis.

k. To study possible absorptions, fusions, or splits.

l. For all types of operations of an investment bank. 


Since it must be prepared, it requires a planning process of the spread that is the decision to make. For very complex situations as an exit of a crisis or a valuation, the study demands many refinements and supports. In order to obtain a relatively small credit to six months, the projections are simpler. What is a very important priority of the cost, is the legislation on the matter, "assuming an ordered process of liquidation"; in other words: combining the sale projections (credit and counted national; exports, according to the country’s regulation) and the charge policies, we obtain the operative income, the base to make a cash flow without considering no type of entrance beside the provided ones by the same business. The different incomes will come depending on the managerial type of decisions at different levels.

The debts, characterized by a greater degree of certainty must be classified per monthly periods (this is very common) and according to the following order:

a. Public prosecutors: everything that has to do with the government. "To take money away from the state constitutes in a very high risk, in addition to the implications of moral and penal type".

b. Labour: everything that has to do with the payments to the personnel who work in the organization, considering the date of payment. For example, the primes are caused as the period advances, but they are paid in February (also payments on other dates can be programmed).

c. Operation: everything that must pay itself so that the company operates and can generate cash for the different public. Example: rent, public services, monitoring, cleanliness, stationery store, maintenance, etc.

d. Suppliers: who by their character of so, must receive a high-priority treatment thinking in the operation of the company. The company must always think in win-win terms, and pay the suppliers promptly, in addition to the multiple advantages that can be negotiated.

The difference between the operative income and the debts by the four previous concepts (fiscal, labor, operation, and suppliers) must always be positive in the period of one year. Otherwise, it is because of a structural problem, for example, the operation may not be profitable, which we would have to be corrected before thinking about any other type of analysis.

For the aforementioned, the projection of the earnings statement and the traditional indicators of the financial analysis and the EVAp are used, because it includes special expenses which in the long run is investment and appropriations for human resource upgrading, investigation, and development, positioning, and preservation of the environment, all of this must be accompanied with benchmarking.

The adjustments that may arise, most of the time, have effects on the cash flow that we must insert in the spreadsheet. So that the situation is "normal" the accumulated final balance must finish with available (cash + temporary investments) an equivalent one to the cycle of cash (inventory days but (+) for portfolio days (-) equivalent days of suppliers) multiplied by the value of a day of the treasury, which calculates by dividing the total of payments of cash projected by a number of working days of the exercise (year). If a positive balance appears every month, and the accumulated game is superior to "the normal" number, this indicates that it must be available to distribute dividends to the shareholders or to study alternatives of investment in other fronts. On the other hand, if the periodic situation and the accumulated final balance are negative, it implies a no liquidity situation that we must study carefully to detect its reach and to decide the action plan (to see crisis and alternatives).

A good form to make the analysis consists of taking the matrix from the spreadsheet which is discriminated against month and with accumulated data. Also, the following questions must be made:

a. How and why can more months show cash surplus?

b. How and why do the monthly statements show shortage?

c. The same question as the above must be made, but quarterly.

d. If any appreciable error is not observed, we must be concentrated in accumulated numbers and soon compare with such red of the previous exercise seeing if the great differences have a logical explanation.

e. If everything is normal, the end of the previous period is added to the initial balance and the effect is observed on the accumulated number.

f. Using the state of sources and projected cash application, we can analyze if the numbers are consistent with the cash flow.

The great advantage of the spreadsheet is the possibility of making simulations with possible viable alternatives, for example:

a. What would happen if we were to raise in a % (considering the elasticity of the demand) happens?

b. If we make promotion with an inventory at a certain time, this will be the effect over the cash flow.

c. If we were to make promotion with an inventory, what would happen to the earning statement projection?

d. How serious is the effect when negotiating with a factory?

e. How would a reduction or extension in suppliers affect us?

f. That incidence would have a wage negotiation (percentage increase as of date)

g. That effect could have an operation of leasing in any of the forms

h. Those implications would have a change in the legislation corresponding to the currency handling



At the macroeconomic level, the best way to help the companies improve their cash flow is by attacking inflation. Given increased price levels, which are a constant for all the companies of the same country, we can:

a. Reduce the cycle of production and sales.

b. Decrease amounts in inventories (efficiency).

c. Through suitable and efficient management of the portfolio.

d. Obtaining yield so that it can feedback with the liquidity.

e. Being efficient in the purchasing function. 


a. Because of inefficiency, which generates a decrease in the yield, whose relation with the liquidity is directly proportional, in the measurement that the financial structure of the company is adapted.

b. Because of sub-optimal inventory handling, portfolios, and cash.

c. Because of a sales reduction in relation to the budget.

d. Because of increases superior to the budgeted ones in any of the debits.

e. Because of changes in the tributary legislation (also, it could be favorable).

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