12.05.2011

Cash-flow management is an important tool for achieving success and avoiding failure in business.

Going into business in Israel can be enormously satisfying if it results in the development of a new or better technological product. But the business must generate cash flow if it is to flourish and make you a living.

Cash flow must be actively managed – it doesn‘t just appear on demand. And if you don‘t pay your taxes on time, the Israel Tax Authority‘s computer system doesn‘t forget or go away – it starts adding interest, indexation and penalties to your balance.

This article was written after two unrelated businesspeople complained they couldn‘t pay their taxes but didn‘t know where the cash had gone.

What is cash flow?

Cash flow is the total movement of cash in a business, including receipts and payments, both known and expected. You must also take into account receipts and payments that are past their due date but haven‘t yet been received or paid. You should take into account the full amount of each receipt and payment, including VAT, allocated time-wise according to their due date.

What use is cash-flow management?

Cash-flow management offers many advantages, including the following:

 It is a tool that facilitates proper financial control over a business.

 It helps you plan and implement investments.

 It gives you broader future vision of your business vis a vis total anticipated expenses payable over time: salaries, suppliers and taxes.

 It helps the business owner or management negotiate desired payment dates and payments on account with customers and suppliers.

 It helps the business budget ahead; i.e., hire more personnel, buy or sell fixed assets, more R&D, more marketing.

 It may warn of cash-flow shortage periods, so you can prepare; e.g., by requesting temporary bank borrowing.

 In an extreme case, it helps the business owner consider postponing payments (but generally not tax payments).

Cash-flow forecast

To achieve the above benefits, a cash-flow forecast needs to be prepared. Often this is done as a spreadsheet model. This should be done as accurately as possible in the circumstances and updated regularly.

Sometimes it is prudent to build several versions; for example, ‘‘optimistic,‘‘ ‘‘pessimistic‘‘ and ‘‘best estimate.‘‘

Sometimes a PowerPoint summary is also prepared if investors or potential investors need just the highlights.

Past or forward-looking?

Past results should be available from accounting records and financial statements of the business, and you should use these as a basis for understanding how the business has performed to date. But cash-flow management helps plan your cash flows in the present and future so you can consider what action is needed.

Forecasting the future is never completely accurate, but it is usually possible for the near future and still partly possible as you project further ahead. A good businessperson should de-risk things as much as possible by collecting relevant information, and cash-flow forecasting is part of that process.

How is a cash-flow forecast produced?

 Record opening bank balances.

 Enter all receipts, known and expected.

 Enter all payments, known and expected.

 Calculate closing bank balances at the end of each relevant period (daily if you are really serious; at least weekly or monthly).

What receipts are included?

 Business revenues.

 Loans received or expected.

 Equity investments received or expected.

Should VAT or income tax refunds due be included? Probably when received, not before. Although the tax laws contain time frames for refunding taxes, they can usually be overridden if tax officials want to check things first; this is how bureaucratic delays are usually ‘‘explained.‘‘

What payments are included?

 Business payments.

 Loan repayments

 Fixed-asset payments.

 Owners compensation, etc.

To sum up
Cash-flow management is an important tool for achieving success and avoiding failure in business. Making an accounting profit or breaking even is not always enough – cash is king.

The main reason for cash-flow difficulty in businesses is a mismatch between the due dates of expenditure and the dates that receivables are collected. Cash-flow forecasting and management can help minimize these risks.

As always, consult experienced professional advisers in each country at an early stage in specific cases.

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Aneta Zamir is an adviser and lecturer on accounting and cash-flow management at Numerus Advice & Financial Management and at Harris Consulting & Tax.

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Leon Harris is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.