5 Steps to Improve Cash Flow For Cash Surplus Companies


Read this ebook to understand the difference between cash surplus and cash deficit companies and learn the ways cash surplus companies can optimize their cash flows.

Contents

Chapter 01

Cash Surplus vs Cash Deficit Companies

Chapter 02

5 Steps to Improve Cash Flow
Chapter 01

Cash Surplus vs Cash Deficit Companies


Companies can be classified into two types based on their cash position:

  • Cash surplus companies/ Net investors
  • Cash deficit companies/ Net debtors

Based on cash position and financial situation, the drivers influencing the purpose, accuracy, and frequency of cash forecasting vary.

Learn the key differences between the two types of companies in detail:

Cash Surplus vs Cash Deficit Companies

Cash Surplus Company

Cash Deficit Company

Definition

Companies with cash in excess of what is required for running day-to-day operations
Companies suffering from a cash crunch to meet their working capital obligations

During Crisis

Cash surplus companies have their businesses booming
Cash deficit companies are struggling to make their ends meet

Cash Situation

Plenty of cash reserves
Utilized most of the revolvers

Cash Forecasting Driver

Business expansions, investments, and M&A
Tightly manage cash, and identify and mitigate risks

Degree of Accuracy and Frequency

Forecast with reasonable accuracy and frequency
Forecast with high accuracy and frequency
Chapter 02

5 Steps to Improve Cash Flow


The key steps to make effective decisions during a cash surplus situation are as follows:

Run scenario analysis:

Unforeseen circumstances have considerable effects on a firm’s revenue, and overall performance. Running scenario analysis provides a heads-up to identify the extent of those circumstances. It also helps to take preventive measures to minimize risks or grab opportunities from peak seasons to increase profit margins.
This can be done through the following ways:

  • Incorporate seasonality into forecasts to identify market opportunities and manage assets properly.
  • Identify ‘what-if’ scenarios through accurate cash forecasts.
  • Use a system that supports manual override to factor in ad-hoc adjustments into the cash flow.

Gain global visibility:

Having good visibility into the cash flow holds utmost importance to identify blind spots that could have damaging repercussions, and make informed decisions accordingly. Governing cash flows, identifying risks becomes easier through global cash visibility.
Global cash flow visibility provides an array of benefits such as:

  • Managing working capital better (through controlling repatriation, collections, disbursements) by tracking cash flows at regional levels.
  • Identifying risks associated with FX changes, counterparty, debts, etc.

There are multiple ways to achieve global visibility such as:

  • Adopting centralization across workflows, regional treasuries, systems, etc.
  • Handling multiple entities to gain high visibility at the global level.
  • Using the bottom-up approach of cash forecasting through:
  • Preparing local forecasts across entities, regions, cash flow categories, company codes.
  • Consolidating individual forecasts to gain visibility at the top.

Run variance analysis:

It is necessary to perform variance analysis to analyze the accuracy and reduce the deviations through root cause analysis.
This can be done in the following ways:

  • Compare the forecasts to the actuals over multiple time horizons to analyze the deviation.
  • Investigate the reasons for the deviations, by comparing variance for multiple cash flow categories.
  • Use dashboards to understand the deviation carefully through graphs.
  • Apply M/L algorithms to study the data and reduce the variance over time.

Pay dividends and reinvest:

Passing on profits to the shareholders, investors, and board members helps to maintain relationships. Paying dividends speaks volumes about a firm’s financial well-being and stability.

Creating accurate long-term forecasts secures the businesses through achieving greater ROI for the long run, and supports reinvesting to maximize profits. This puts them in a better position to pay dividends with the excess cash.

Eliminate debts:

Paying the debts owed to banks or creditors in time stops accruing interest on them, and prevents penalties. If the creditors have a strong relationship with firms, there is also a possibility to negotiate and lower the debt owed. This enables cash surplus firms to prevent covenants that restrict spending money for executing their long-term goals.

Creating long-term forecasts helps to learn in advance about the available balance in the investment instruments and plan out long-term debt settlement.

Chapter 01

Cash Surplus vs Cash Deficit Companies


Companies can be classified into two types based on their cash position:

  • Cash surplus companies/ Net investors
  • Cash deficit companies/ Net debtors

Based on cash position and financial situation, the drivers influencing the purpose, accuracy, and frequency of cash forecasting vary.

Learn the key differences between the two types of companies in detail:

Cash Surplus vs Cash Deficit Companies

Cash Surplus Company

Cash Deficit Company

Definition

Companies with cash in excess of what is required for running day-to-day operations
Companies suffering from a cash crunch to meet their working capital obligations

During Crisis

Cash surplus companies have their businesses booming
Cash deficit companies are struggling to make their ends meet

Cash Situation

Plenty of cash reserves
Utilized most of the revolvers

Cash Forecasting Driver

Business expansions, investments, and M&A
Tightly manage cash, and identify and mitigate risks

Degree of Accuracy and Frequency

Forecast with reasonable accuracy and frequency
Forecast with high accuracy and frequency

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