Cash flow forecasting and management

January 05, 2020

The cash flow statement provides insight in regard to a company’s cash position. It is a fundamental reporting tool for managers, investors, and creditors because, together with other financial statements, demonstrates if a business has done well or not over a given period of time. Cash flow refers to the movement of cash and cash-equivalents into or out of a business, project, or financial product. Without positive cash flow, a business is not able to cover its financial obligations. In the worst-case scenario this could potentially lead to a cash crunch or bankruptcy. To keep the business running in a sustainable and profitable way, Umbrella Inc forecasts and manages its cash flow with annual cash budget, operational budgets for individual departments and quarterly reviews.

With annual budgets company’s management tries to balance business’ sources of income against its expenses. The goal is to avoid a situation where the company runs out of cash because expenses are too high or incomes too low. The business needs to be in the position where it can always pay employees, taxes and suppliers. At the same time the right quantity of money has to be investments in products’ innovation and be a step ahead of competitors or at least at the same level. Last but not least, cash is needed for marketing activities that are extremely important to always keep existing customers active and attract new ones.

Umbrella Inc does not have any significant sale on credit, but this doesn’t mean there is no credit risk. A large number of payment solution providers and banks are used by the group to provide maximum access to markets and convenience for customers. The credit risk rating report (Appendix D) showed how credit in banking relationships is spread between different risk ranges.

Umbrella Inc’s clients pay in advance and this is very good because it avoids bad debts, but it is not enough to always have an adequate cash flow. On the other side, purchases are executed only if previously approved in the budget. To keep the situation constantly under control quarterly reviews are carried out as regular check points. When the situation is not in line with the annual budget forecast and the firm runs short of cash some actions have to be done to reverse the negative trend. The first action could be increasing the sales, that for Umbrella Inc means the number of active users. This would require some kind of marketing campaign. Marketing activities are a cost so increasing the sales by increasing the costs can be a risky move and has to be with care. A second action could be to cut costs. This could be achieved by renegotiating existing contracts or canceling unnecessary ones. Current expenses reduction could be achieved also by postponing noncritical activities, new projects start date and/or investments. Workforce reduction could be also another way to decrease the amount of money needed to pay salaries. Last but not least, not all brands and all markets generate the same profit, by shutting down non-key and less profitable websites money could be saved. Another cost control measure could be a review and optimization of the marketing campaigns’ schedule.

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Written by Claudio Maccari . Passionate developer and former windsurfer. You can read more about me here