Do you know how Cash is generated in your Company?

The majority of insolvency proceedings (bankruptcy) occur due to lack of liquidity and not due to lack of equity. In effect, it is the case of companies that can present good Financial Statements but do not generate enough liquidity (cash) to sustain the operation. That is why it is essential to understand well how business decisions affect the creation of cash in a company.

According to the new Superintendence of Insolvency and Re-entrepreneurship (former Superintendence of Bankruptcy), in 2015 the number of companies that took part in the new reorganization and liquidation process was 351 (an increase of 100% vs. 2014). Unfortunately, 306 of these companies (87% of the total), entered into a liquidation process, i.e. all assets are sold to deal with the debtors and the company disappears.

We can distinguish three major criteria to understand how the cash of a company is generated and spent; 1) Operational Cash: It is the cash generated by actions related to the business itself. Can sales be increased? What is the average time for bill collection (account receivable)? What is the average payment time to providers (account payable)? What is the optimal level of inventory? Can personnel expenses be reduced? Can you lower trips, expenses in hotels? 2) Financing Fund: The cash generated by bank financing, factoring, etc. What is the rate we pay for the credits delivered by the bank? What is the duration (term) of the credit? Can you consolidate the debt? 3) Investment Fund: Cash derived from the investments in assets made by the company. Can some investments be postponed? What is the profitability generated by each investment?

Currently, it is essential that the entrepreneurs / managers handle in detail the cash flow statement (current and projected), and how the different variables affect the cash generation of a company.

Ernesto Solís
Partner – Fix Partners

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