Planning the cash flow, between necessity, legal norms and best-practice

When economic cycles point towards a low, it seems normal that the till is empty or almost empty. On the contrary, during periods of prosperity, a full till seems to be a fact.

A doubt - bordering on inexplicable mystery - grips the entrepreneur, however, when he looks at the balance sheet closing in 'profit' and finds the till empty, or almost empty.

This doubt is, in fact, symptomatic of different perspectives: while the profit and loss account and balance sheet are a methodological abstraction that artificially fixes time, cash is a dynamic quantity, so much so that, with reference to fluid dynamics, we speak of flow (cash flow).

The recent introduction of the obligation to also prepare a cash flow statement, which is effectively the only document that tells how much money is in the till, was a big step forward that forced the company to discover its financial dimension, but it did not change the paradigm.

The next effort is to overcome the time lag, the uselessness of information. Knowing today that you have or have not generated cash, and why, four or six months ago (the time of budget approval) makes the information useless because it is obsolete.

The challenge is to look at the financial dimension of the company as a system in motion and to look ahead: to foresee its future dynamics and to implement proactive monitoring that must facilitate the circulation of information through the production of feedback to support governance activities.

Moreover, the regulatory amendment made by Legislative Decree No. 14 of 12 January 2019 (Business Crisis and Insolvency Code) goes in the same direction with the introduction, in Article 2086 of the Civil Code, of the second paragraph that prescribes the establishment of adequate organisational arrangements also in function of the timely detection of business crisis and loss of business continuity. This obligation is incumbent on all companies, of any size, provided that they operate in corporate or collective form.

The first jurisprudential measures on the subject of management irregularities resulting from non-compliance with the provisions of the rule are now well known (the first, in particular, pronounced by the Court of Milan on 18 October 2019).

Businesses of all sizes are therefore called upon to equip themselves with business knowledge and sustainability measurement tools (debt first and foremost). Planning tools such as multi-year plans or business plans, and programming tools such as budgets, must become part of the DNA of doing business.

In the national economic fabric, most of which is made up of SMEs, the question arises, however, as to what instruments are suitable and appropriate to monitor the existence of business continuity: not only because this is imposed by a rule of law, but above all as a rule of common sense, because the loss of a business is a detriment to national wealth and the social community.

An American slang sounds, more or less, like this: "cash is king!" to emphasise the fundamental role of liquidity, and many companies are valued for their ability to generate financial resources.

In Italy, more melancholically and simply, we say: 'Accounts are done on an accrual basis... but you fail on a cash basis!'

Should we plan starting with the till?

The question is only rhetorical, and the real question turns on how to do such planning and forecasting. By means of appropriate tools - such as Microsoft Power BI - used in an advanced manner, it is possible to achieve what is necessary to monitor, and what is more important to forecast, all the most significant quantities for measuring sustainability, starting with cash flow.

We at NSI - Think Outside the Box & Bononia Corporate Finance can help you plan and monitor your cash flow with advanced tools to support you in the sustainable growth of your business.

Write us!

Carmine Mollica - Chartered Accountant and Auditor

Senior Advisor at Bononia Corporate Finance

Stefano Borghi - Chief Technology Officer

Board Member at NSI ThinkOutsideTheBox

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