As we have already mentioned, it is not enough to analyse the company profitability, we also have to check its financial health. There can be paradoxes where the accounting states show profit, but there is not enough cash flow to face the payments. These situations might come from different causes, among them the delay on the customers’ payment.

The cash flow forecast is a financial analysis tool that will allow us know the payments and collections forecast in order of months and therefore, anticipate possible cash problems.

In the cash flow forecast we only show the incomes and expenses that mean a real income or outcome of money, that is, only payments and collections. They will be indicated in the month we expect to cash them, according to what we know as cash criterion. Therefore, for its elaboration, it is especially important to know the average period to collect from customers and to pay the suppliers. So, for example, if this month we have sold for the amount of 20,000 euro but our clients usually pay us in 30 days, this amount will appear in the following month in the cash flow forecast.

As it is a collection and payment relation, we should also include the VAT we charge to our customers (output VAT) and the VAT we pay for our expenses (input VAT). We should also include the forecasts of the taxes as a result of the three-month VAT settlement.

Interpretation of the cash flow chart

Once the amounts have been written into the chart, although it is perfectly logic and feasible that in some months, the money incomes are higher than the outputs, the accumulated amount in cash flow should always be positive. If not, as we are making a forecast, we should know the month/s there is a negative balance and the amount to be able to take the opportune correcting measures.

Therefore, the aspects we should observe are the following:

• If the accumulated balance in cash is credit:

1. Trend: if it is going down it might become negative
2. Identify the months with the lowest balance: are they worrying? Could we face possible unexpected situations or biases of the forecast?

• If the accumulated balance in cash is debit:

1. Trend
2. Length: is it a punctual lack of cash or does it last for several months?
3. Amount: the highest debit accumulated balance indicates the total amount of additional financing needs.

Correcting measures

Depending on the aspect we have observed, the correcting measures will be planned in one or another direction:

Momentary lack of cash-flow

If there is debit balance of cash flow in certain moments and they are easily corrected the following months, the measures to be taken will also be focused on the short term.

The choices are multiple, but we can underline, among others:

• Negotiation to delay or instalment payment to suppliers
• Instalment payment of taxes if it is possible
• Bring the collection to customers forward through incentives such as early payment discounts.
• Asking for external financing in the short term, for example credit policies.

Persistent lack of cash flow:

If there is persistent lack of cash flow, we should observe its trend:

• If the trend is positive and after some reasonable time, the incomes are able to balance the expenses, we should take medium or long term measures, such as:

1. Increase the initial investments of the partners
2. Ask or increase long-term financing, for example, through loans
3. Temporary decrease of structural expenses until we reach the break-even point (promoters’ salaries, loans with interest-only periods…)

• If the trend is negative, being the lack of cash flow increasingly severe and without any expectation to get corrected, it will be necessary to plan our enterprise strategy again. It is possible that we are not facing a cash flow problem but a possible lack of feasibility of the business.