How to Stay Out of Cash Flow Crises Using Cash Position Analysis

Cash flow is the lifeblood of every company.

Diligent financial analysis, including the Cash Position Waterfall, is an essential component to monitoring the current health of your business.

However not all of us are financial analysts who like to wade through detailed spreadsheets.

This is where good data visualization comes in. By presenting information in graphical form, every manager can grasp what is happening with cash flow. And, when every manager understands the important business metrics, most companies will achieve far greater success.

Why is a Cash Position Waterfall essential to survival?
The idea behind a Cash Position Waterfall is simple and generating a waterfall chart is easy. The key is to understand what data are needed and how to organize it. But before going there, let’s take a minute to review the “what” and “why” of cash position analysis and forecasting.

For mid-size and fast growing companies, keeping track of cash position and cash flow in a meaningful way is difficult! The statement of cash flows is a standard component in a set of financial statements and is used to reveal the sources and uses of cash by a business. It presents information about cash generated from operations and the effects of various changes in the balance sheet on a company’s cash position.

Cash flow is most commonly calculated using the indirect method. It can easily be derived from existing reports within the accounting system. The indirect method takes net income and adds or deducts non-cash revenue and expense items, resulting in net income generated by operations. However, the preferred method for reporting purposes is called the direct method.

The advantage of the direct method over the indirect method is that it reveals operating cash receipts and payments. Unfortunately, the direct method is rarely used because the information in it is difficult to assemble; companies simply do not collect and store information in the manner required for this format. Using the direct method may require that the chart of accounts be restructured in order to collect different types of information.

A simple approach to financials for visual managers
The main benefit of the direct method is that it provides visualization of cash position. The waterfall chart simply and quickly summarizes company cash inflows and outflows. If you look at the chart below, you will notice that there are many different outputs (expenses) compared to the few inputs (revenues). Expenses are typically more reliable and consistent than revenues. This is what keeps managers awake at night!

The cash flow waterfall is the only view into all the cash items that must be managed to keep a company afloat. 

The Cash Position Waterfall is employed to calculate and monitor the net movement in cash balance as well as the ending cash balance for a given period. With this information, a company will know if it is meeting its financial and operating objectives, and, if not, how serious the problem is and most importantly - what is causing the problem.

The Cash Position Waterfall more specifically ensures that cash inflows and outflow items are prioritized in the best interest of the business. When cash is tight, segmenting and prioritizing debt payments can be key to managing suppliers and cash flow.

Build a Cash Position Waterfall today
Back to how to build a Cash Position Waterfall. All the data is in the chart of accounts and will typically reside in a general ledger table in your financial system. To build a cash flow waterfall, all cash flow items are organized in the order in which they occur. The main categories could be:

• Revenues
  

• Expenses
  

• Tax
  

• Debt service
  

• Distributions
  

• Net movement in cash balance

Key outputs are a series of cash flow trends. The specific line items of value are:

• Net cash position
  

• Source and size of debts
  

• Source and size of revenue

And, by using an interactive dashboard, we can drill down to the detail within each expense area to help strategically manage cash. On the dashboard above, trade shows are clearly the greatest expense. By drilling down to line item detail, we can make more informed decisions about where to re-allocate or cut.

About Keith Peterson

Keith Peterson is the President and CEO of Halo Business Intelligence. Keith is a senior executive with expertise building data analytics organizations with strong financial and strategic value. He believes in challenging convention and has spent his career pursuing new solutions to old business problems through data, analytics, and technology. In particular, these approaches have focused on predictive and geospatial analytics. Follow Keith on Twitter for the latest on BI and Supply Chain Analytics at @KPeteHalo.