On previous occasions we have talked about how important it is to have an updated cash flow in order to identify the liquidity needs that we will have in the short and medium term, this is vital in the development of our projects, since unfortunately, if we fall short of box at some point and you don’t have planned in advance what to do, who to turn to, can have a terrible effect on our project, for this reason, we want to take advantage of today, to reinforce the difference between a P&G (status of losses or earnings or income statement) and a cash flow. For this we will briefly explain what each of these concepts contains:
- P&G: It is one of the most important financial statements for any company, regardless of its size, and it indicates the total sales, returns, costs (expenses directly associated with the production of the good or the provision of the service), administrative expenses and sales and financial expenses that we are incurring in a certain period (month, quarter, semester or year). The P&G tells us what is the profit or loss that our project presented and for this reason it is extremely important to constantly review it, in the company of the accountant, to identify points where we can make improvements.
Now, taking into account the topic that brings us today, the P&G tells us the sales made or the costs and expenses incurred in a certain period, but it does not tell us if, in the case of sales, these have already been collected or if the costs and expenses related have already been paid, since this financial statement is governed by the accrual system, that is, it reflects in the period under study the economic events that were incurred, disregarding the impact on the company’s cash for them. For example, we could have a very large number of sales, however, they are credit sales and the collection will be made depending on the credit policies that we have established, or likewise, we may have incurred a high cost or expense, but the same we will pay in the following month or we may pay it in installments. - Cash Flow: More than a financial statement, it is a super important report, which in summary indicates the total income and cash outflows in a given period. The cash flow can be as explanatory or extensive as we want, that is, in income we can ask to be informed of the cash income for the sales made to each client or by geographical area and in the case of costs and expenses we can ask for the detail of disbursements for concepts (payroll, contributions to social security, leases, etc.). The net result of the cash flow will indicate the economic resources available to our project at the end of the period.
Taking into account what has been said in the previous points, if we seek to identify in advance, the liquidity needs that we will have, we must go to a Projected Cash Flow, in such a way that it indicates in which period a liquidity need may arise, what amount and check what payment term our project can assume.
In another opportunity we will report on the different alternatives that we can manage to face a need for liquidity.
Efinti: Liquidity without Borders!