A cash flow analysis is a financial analysis that shows how money flows into and out of business over a specific time. It can help the treasury team comprehend where their money goes and how much cash they have on hand at any given time. This must be done at least monthly to ensure that the company’s cash flow is healthy.

A corporation must first prepare cash flow statements for operating, investment, and financing cash flows to perform a cash flow analysis.

To calculate net income, the cash flow statement direct method applies all cash receipts from operating operations and subtracts all cash outflows from operating activities.

Non-cash revenue and spending elements are added or subtracted from net income in the indirect cash flow statement.

Can a profitable business have cash flow problems?

Net cash outflows may not always imply that a company is experiencing cash flow problems. When making massive payments or dealing with seasonal business changes, businesses frequently experience a net cash outflow. When outflows surpass inflows, cash flow becomes an issue. At that moment, a company had depleted its cash reserves and could not meet its obligations.

When analyzing a company’s cash flow, what factors should be considered?

• Cash flow from operations:

  A company’s goal is to make a profit, and while a few months of losses from operations aren’t always critical, this number should be as positive as possible. The ideal scenario is this line increases every quarter or at least every year.

• Income not yet paid by customers:

  In this scenario, a company has profit but has uncollected debt from their customers or late payments. This significantly decreases the company’s overall cash flow and may indicate that the company should do a better job collecting invoices. 

• Investment in equipment:

  Unexpected costs can disrupt a company’s cash flow. A corporation needs to spend money on new equipment. This is generally a one-time expense that will pay off in future cash statements.

• Ending cash balance:

  Ending cash is the amount of money a corporation has after deducting the cash change and starting cash balance for the current financial period. Companies face various scenarios. For instance, uncollected debt, an unexpected equipment purchase, and cash pulled by the company’s owner. These affect a company’s capital if scenario analysis is not done properly.

Treasurers nowadays are trying to find a comprehensive and adaptable solution. As the corporate treasurer’s job becomes more complicated, more businesses turn to automated cash management software that helps them remain on top of their finances.

Advantages of using automated solutions to improve cash management

1. Matching items from the prior day’s bank statement automatically:

   An automated solution auto-reconciles transactions utilizing standard and user-defined rules without requiring any manual intervention. It can also be manually utilized to match or repair any inconsistencies. Automated bank account processing and reconciliation saves time, reduces errors, and allows the management to focus on other important tasks.

2. Capturing cash positions on a daily basis:

   The solution helps in obtaining a consolidated picture of data flows from banks on a daily and intraday basis. This helps to improve cash positioning and report accurate numbers to the CFO and external stakeholders. Accurate cash positioning also helps a firm determine if its liquidity is healthy enough to meet the daily obligations and go for growth activities.

3. Gathering data automatically from multiple data sources using APIs and sFTP:
   A cloud-based cash management platform seamlessly connects to all banks, ERPs, and independent market data sources to process files in a variety of formats, including XML, BAI2, MT940, ISO20022, XLS, and CSV, removing the need to download data from portals manually. Transactions can be automatically categorized by bank, account, location, and category. Additionally, open-banking APIs bring together and standardize transaction data from several banks into a single, real-time dashboard, giving users rapid access to a wide range of cash reporting capabilities. This improves real-time visibility for effective decision-making.

Advantages of using automated solutions to improve cash forecasting

Automated cash flow forecasting helps in:

1. Auto-classifying bank inflows and outflows:

   For improved reporting and analysis, transaction information from bank files is automatically classified into operational and non-operational cash flow categories.

2. Managing and optimizing cash flows accurately: 

   With accurate cash forecasting software, a corporation’s financial status and liquidity can be understood better, allowing the organization to control and distribute funds with greater accuracy and confidence. Moreover, businesses can spend more time setting financial goals and gaining buy-in from key stakeholders by using automated reports. 

3. Predicting payment dates accurately:

   Treasurers can use predictive analytics to investigate customer payment behavior trends and precisely estimate cash inflows based on predicted payment dates.

4. Performing accurate scenario analysis:

   If the company is going through a rough financial patch, revising the cash flow projection daily can help identify hazards ahead of time. If necessary, the user can override or tweak data to identify different what-if scenarios and take necessary actions proactively. This helps to maintain a positive cash flow throughout.

The end goal for technology evaluation is to select a system that meets the treasury requirements. To identify the must-have metrics for treasury solutions, choose the right parameters to be included in your primary scrutiny. 

The following are some of the most common criteria used by organizations to conduct this screening process:

This essential metrics scorecard will assist you in comprehending the key features of treasury solutions. Here’s a ready-to-use template that can be used as a reference to select a best-fit forecasting tool for your cash forecast.

Ready to use template for cash forecasting and  cash management

Following a preliminary screening, the next step is to use the template to compare tools at the solution feature level. This can be accomplished by giving each tool a score based on the dexterity of the features given in the RFP.

Below is a sample representation of the template for the final tool evaluation for cash forecasting:

Below is a sample representation of the template for the final tool evaluation for cash management:

After looking at the evaluation and calculating the final scores, it becomes easier for the CFO to decide on which tool to choose for automating the treasury processes.

Coming to assessing the tool, an enterprise should not only focus on the look or feel of the tool but also prioritize its effectiveness and value. This can be done by evaluating:

Before implementing the new tool for the treasury process evaluate the pain points to see how well the tools help the company grow and produce revenue with finance digital transformation.

Schedule an initial call or a brief demo to understand:

Use this ready-to-use template for shortlisting and selecting the best-fit cash flow tool for your treasury.