Systematic cash flow management is one of the most important prerequisites for the day-to-day operation of a company and the achievement of long-term goals. When cash flows are insufficient, this is immediately reflected in the company’s finances – there are difficulties in paying the invoices of supplies or taxes. The company’s growth is also slowing down. Part III of the series of reporting posts is about which reports to use for cash flow management and how to manage cash flows in a way that supports the development of the company, not hinders it.

The goal – to obtain control over cash flows

When talking about cash flows, we should first start with the fundamental difference between cash and profit and which transactions affect one or the other. 

Profit is accrued income minus accrued expenses, including the costs of goods sold.

Cash is all cash income minus cash expenses.

Which transactions affect profit/cash: 


profit cash
value-added tax NO YES
taking loans and repayments NO YES
purchase of fixed assets NO YES
purchase of goods to warehouse NO YES
depreciation of goods from warehouse (including sales) YES NO
depreciation of fixed assets YES NO
cost capitalization YES NO
vacation reserve YES NO
asset write-downs YES NO
estimated costs and benefits YES NO

The cash flow depends on

  • how quickly customers pay you
  • how long payment terms have been given to you by your suppliers
  • amount of loan payments 
  • amount of fixed asset purchases
  • amount of cash withdrawn from the company by the owner (spent for own use, e.g. expensive trainings, car).

Profits are accounted for on an accrual basis, by involving a number of options. Therefore, the result of the income statement can be much easier influenced. Profits are affected by, among other things:

  • limit of fixed assets – i.e. to what price the fixed assets are expensed and when they are recorded in the balance sheet
  • determination of the life of fixed assets, i.e. the number of years within fixed assets are expensed
  • capitalization or depreciation of development costs
  • establishing of various reserves – these enable to reduce (and further increase) profits, if required
  • write-down of receivables, inventory and investments – based on conservative approach.

Identify problem areas

If the importance of cash flow management is underestimated, a completely profitable company can also go bankrupt due to lack of cash. To avoid the tense situation, ask your accountant to prepare a cash flow statement for the previous two years and the last months separately, and identify the problem areas. Some of the most common problems to deal with:

Customers do not pay their invoices on time

Poor process for managing outstanding invoices results in too lengthy period of receipt of claims and your money is stuck under the latter. These could remain outstanding as well.

What to do?

You should have proper credit policy – how to assess potential customers to whom credit can be sold and what to do, if invoices remain outstanding.

Payment terms for purchase invoices are too short

If in case of sales invoices you had to deal with receiving the invoices as soon as possible, then here it is vice versa – try to get the longest possible payment terms.

What to do?

Review the payment terms of your suppliers, it is often possible to negotiate and get longer payment terms. Note that here you have to be active yourself, no one will offer you longer deadlines on the tray. Ask the accountant to pay the invoices on time, not earlier.

Too much inventories

Too much inventories means a full warehouse but an empty bank account. The same applies to the service provider if you have not submitted invoices for a large amount of work (work in progress).

What to do?

Review your inventory ordering and inventory management system, assess the level of inventories reasonable for your company. As a service provider, consider whether it is possible to divide long-term work into logical pieces and submit invoices in parts, rather than finally at a time.

The management of sales invoices, purchase invoices and inventory processes together is called working capital management. When a company grows rapidly, receivables (and inventories) often grow very quickly and the company needs additional financing to offset it.

You can read more about the calculation of the company’s working capital cycle and the need for additional financing in the article – what is working capital and why is it important.

Inappropriate loan and equity structure

It is often possible to significantly improve cash flows by reviewing the existing loan agreements. Maybe loans should be consolidated? And pay back in the long run?

Sometimes the main reason for the tight cash flows can be the owner who has taken too much money out of the company. Maybe it would be worth reducing the amount of dividends to be paid? Or add the owner’s money to the company instead, by increasing the equity?

Fixed assets are financed on account of the loans and equity, so all important purchases of fixed assets should be planned in advance and suitable financing should be found for these.

What reports do you need to manage your cash flows?

To manage cash flows, ask the accountant for the following reports:

  • short income statement
  • short balance sheet – by highlighting the lines to be dealt with (e.g. receivables or inventories)
  • balance sheet ratios (e.g. average receivables in days or inventory flow rate)
  • cash flow statement compared to the cash flow budget.

These reports help you gain more control over your company’s cash flow management and identify problem areas that need to be addressed. If you need additional tips to improve your cash flows, then also read this article: 7 ways to improve your cash flows + 50 additional tips for better cash flow management.

As the operations of the company expand and sales revenue increases, it is important to monitor how money and profits change over time. Does profit increase linearly with sales revenue? How do costs change at the same time? Tracking your company’s numerical data gives you valuable information on how to grow your business and profits steadily. Establish an effective reporting system to keep up to date with key indicators.

Read more

There is no one-size-fits-all reporting. However, there are more common reasons to deal with management reporting. These reasons as well as needs are – how to grow faster, make more profit, control cash flows and manage company more effectively based on numbers. In this article we will focus on the first of them, i.e. we will explain in more detail how to support the growth of a company with reporting.

The goal – rapid growth

There are roughly three ways to increase sales revenue:

  • sell to more numerous customers (find new ones and keep the existing ones)
  • sell more times or
  • sell more at a time.

Company growth formula: 

All customers = (existing customers x stability rate = existing customers) + (potential customers x conversion rate = new customers)

Sales revenue = all customers x average number of transactions per year x average transaction size

To grow faster, you can address five topics:

  • increase customer stability rates – how many existing customers will stay with you
  • increase the number of potential customers – people interested in buying from you (result of marketing activities)
  • increase conversion rate – how many potential customers will become your customer (sales result)
  • increase the frequency of sales – the average number of transactions per year
  • increase the average transaction size.

Choose one or more of them and create a solution that will increase your profit.

Which performance indicators to analyze?

To find the right performance indicators or KPIs, write down your last year’s sales revenue calculation with actual numbers. If you are missing any number (such as the number of potential or loyal customers), it is high time to start measuring these. Once you have drawn up your scheme, you will find “low hanging apples” or the parts that are relatively easy to improve.


One generalized case study of professional services company has been provided below.

Three service company metrics or KPIs were identified that could be easily improved.

  • conversion rate, from potential customers to real customers (was: 50%)
  • average purchase value (was: 1560)
  • variable costs as % of sales revenue (was: 70%)

As the improvements required certain costs, the overheads slightly increased.

First KPI: conversion rate

The company had established the routine that the offers were made by the owner. The conversion rate was barely 50% that needed a significant improvement. To this end, a standard tendering procedure with a follow-up protocol was established. In addition, simpler bidding was delegated to specialists.

As a result of the change the conversion rate increased to 75%. The total number of customers increased by 5%.


existing stability retained
customers X rate = customers
existing 765 95% 727
new 765 95% 727
potential conversion new
customers X rate = customers
existing 145 50% 73
new 145 75% 109
existing 799
new 836
growth: 5%

Second KPI: average purchase value

The second KPI required to be changed was the average purchase value. This change was easy. The prices of various services were reviewed. Some of the latter were found greatly underestimated and their prices were raised. As a result the average purchase value increased by 5%, i.e. the new value was 1638.

As a result of these two changes (increased conversion rate and average transaction size) sales revenue increased by 10%.


total transactions transaction annual
customers X per year X value = sales revenue
existing 799 1 Jan 1,56 1,371,513
new 836 1 Jan 1,638 1,505,404
growth: 5% growth: 10%

What should the reporting include?

In order to regularly monitor the performance indicators or KPIs in the above example, the management report should include:

  • brief income statement
  • detailed analysis of sales revenue, especially as regards the growth formula of this company, focusing on the currently important indicators
  • performance indicators (if possible, e.g. number of sales calls, website visitors, published articles, etc.).

Rapid growth is often accompanied by losses and “money burning”. Profit growth is much slower, but start-ups do not have that time, so they mostly raise money from investors. If your cash reserves are scarce, you should also carefully monitor the cash balance of your account so as not to get into payment difficulties.

In addition to the above-mentioned reports the following is required:

  • cash flow budget
  • actual cash flow statement with monthly budget comparison

If you need to have more control over your cash flow, be sure to read the article on cash flow management. If you wish to set up management reporting that supports rapid growth and is suitable for your company, then contact us! Robby&Bobby’s financial management services include cash flow management, budgeting and reporting, cost accounting, regular financial coaching and an annual review of the action plan and objectives.