How do you manage your liquidity reserves more efficiently?

Cash flow – one of the most important financial indicators

A company’s cash flow is one of the most important financial indicators in determining whether a company is on a solid footing, whether the set rate is working or whether the company has enough customers. If you want your business to thrive, you must have complete control over your cash flow as a business owner. Negative cash flow isn’t always a bad sign. However, the reasons that led to this should always be analyzed. For example, negative cash flow is accepted in the early stages of a company if the company is expanding its activities or if the company has already built confidence in the market.

Simply put, positive cash flow means that the money coming into the company is higher than the money coming from the company – in other words, the company is making an immediate profit and has enough money to cover its expenses. It’s not just about the invoices or trade receivables that can be seen on the balance sheet. This means that customers have already paid the bills. Potential client bankruptcy—remember the bubble that arose in the American real estate market eleven years ago—must be eliminated, as is fraud, theft or force majeure, which could lead to bills not being paid.

What is cash flow and why is it important to your business?

Strictly speaking, cash flow is a relatively pure form of earnings analysis. For business owners, strong and positive cash flow is important for several reasons. Most importantly, it acts as a buffer in times of uncertainty, such as a recession, and helps you keep your business going, even when the market situation is challenging. It also protects the company from losing credit due to unpaid bills and ensures that it has the means to cover its debts. If you want to expand your business, a strong and positive cash flow will allow you to invest a portion of your income back into your business without having to use external financing.

Funds coming in and out of the company are described in the cash flow statement, which assesses how well the company is managing its income and expenses. The cash flow statement determines whether the company has enough money to carry out its day-to-day operations. In addition, it is a useful tool for predicting the future of society. So is positive cash flow good and negative cash flow bad?

This is basically true, but it’s not that simple. For example, Audi recently announced a cash flow cut, but it didn’t affect the financial markets. This may be because analysts have long known that Audi – like all car manufacturers – is in a state of change that requires significant investment. Today, analysts may consider the rise in investment activity as a positive sign and a sign of prudent management.

Thus, negative cash flow is not always a bad sign, but nevertheless the reasons that caused it should be examined. A cash flow statement can provide a deeper look into a company’s expenses and help determine the cause of negative cash flow. However, it is clear that permanent negative cash flow will eventually lead to bankruptcy – which can take various forms in this case.

For example, Amazon has been able to satisfy investors and shareholders despite negative cash flow from its operating business for more than a decade. Thanks to financial support, this giant retail company managed to overcome the unfortunate period, even in 2003 it recorded at least a small profit for the first time.

cash flow indicators

A superficial view of negative cash flow leads to a negative signal. If your company needs a purchase loan or is looking for financing, a potential lender may be concerned about whether your company can pay off the debt in the long term. The lender may request that the risk premium be included in the interest or may not provide the loan at all.

This often happens today in new companies that are looking for funding to start and grow their business. Many business owners overestimate the sales potential of their products or underestimate many small operating costs or the amount of marketing costs required. In addition, investors usually want to take a close look at a company’s finances before investing large sums of money in it.

The main indicators of the evolution of cash flow

An important indicator of the current and future development of cash flows is the so-called operational workflow model, also known as the cash transfer cycle. Ultimately, it is the time it takes for the company to recover the money spent on primary products or raw materials and get them back in their account. The difference between the terms of payment for incoming and outgoing invoices, as well as the time of production and storage, plays a role here. In general, of course, you also need to consider the possibility of non-payment or default.

The measured variables are called:

DSO = Payment Pending Period or Debit Time – How long on average do customers take to pay?

DIO = depletion period or storage time – how long do primary products remain in the company before they are left as finished goods?

DPO = Late period – Supplier time – How long does it take businesses to pay bills to their trade creditors, including suppliers, vendors, or other businesses?

Values, as well as their sum, naturally vary between companies, but investors use them to get an idea of ​​how a company is doing by comparing numbers to industry standards. For example, a high turnover of money means that there is a large amount of capital in production and storage. Production includes everything that is important to sales, such as marketing expenses. A permanent deviation from the industry standard may indicate that management does not have sub-processes under control.

However, if the storage time is very short, for example, this may indicate a low level of inventory. This may – but should not – mean a risk to the investor. At the very least, he will see a deviation from the standard as reason to be suspicious of this part of the business process.


The foundation of every business repertoire – even in your own company – is getting a clear picture of your cash position. High liquidity allows you to protect your business in many ways. For example, if you need transitional financing to take on the time lag between expenses and expected income, it will increase the cost of the entire production and ultimately the product itself. In this case, simply adjusting payment targets on invoices issued can be important.

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