Latin America is a region that has suffered the economic consequences that various world situations have brought, in 2022 inflation continues to rise and is expected to close at 8.2%, according to ECLAC.
The most affected by the situation have been the Mipymes, these that represent 99% of formal companies in the region, are in a situation complex: uncertainty, consumer confidence in the face of rising prices (In the Dominican Republic, inflation is at 9.43% according to figures from the Central Bank )and the volatility of the dollar, can make them make decisions that do not help them understand the obligations they have with collaborators, suppliers, regulations and banking entities. This is where cash flow becomes relevant.
What is a cash flow?
The cash flow is an indicator of liquidity which represents the effective inflows and outflows of money that occur in a company. It is important to keep this in mind, since not all sales represent an inflow of money and not all expenses represent an outflow.
In order to know what cash corresponds to cash flow, you must identify what type they belong to, there are three types of cash flow according to the Economic Encyclopedia:
- Operating Cash Flow: Contains the flows that enter and leave the company due to its operations or commercial activity. This flow includes revenue from sales and expenses from payment to suppliers.
- Investment cash flow: These are the income and expenses that the company has according to the investments it has. This reflects the collections that are held for non-current assets, as well as the payments that must be made. It is also understood as the money that has entered and exited for an investment.
- Financial Cash Flow: This contains the amount of cash that has entered due to the issuance of shares or debt and the expenses that have had to be made due to the payment of dividends to shareholders.
In the cash flow the profits or losses are not analyzed, but the balance of the company, information that is used for decision making.
About, Daniel Aterhortua, CFO of Alegra.coman accounting, administration and electronic invoicing platform in the cloud with more than 700 thousand users in Latin America, shares the following recommendations on how to maintain cash flow in the current situation of inflation:
- Analyze the situation of each company
The first thing that should be done is an analysis of the current situation of each company, a call for calm before entering into decisions that put the business at risk, such as terminating contracts or changing lower quality supplies. Questions such as what is the work modality? How is your supply chain doing? Is a trade adjustment needed? Can my customers continue to consume my products or services despite the increase? They are the first to be resolved.
- Propose scenarios and possible solutions
After the analysis, the ideal is to propose possible scenarios and solutions, since maintaining cash flow will help reduce uncertainty and project against any possible situation. For them you can have the following alternatives:
- Reduce investment or redirect promotional efforts. Reassess how potential and current customers can be reached by reducing the cost of dissemination, or even substituting those that do not generate any cost. Take advantage of contact with your current customers to better understand how to communicate your value offer to them.
- Reduce the quantities to be produced to avoid falling into excess inventory and thus control variable costs.
- Reduce costs and expenses not necessary for the operation of the company.
- Keep in mind the priority expenses
Every company has priority expenses that are necessary so that the operation is not affected. Among these expenses are: employee salaries, payment to suppliers, social security and taxes. According to the analysis and the situations that arise, it is possible to enter into negotiations with each of the cases. In the case of collaborators, it must be remembered that they are essential for the operation of the business, as well as a good relationship with suppliers.
- Implement a cash culture in the company.
If the situation has already been analyzed, the possible scenarios proposed and the expenses prioritized, we are on a very good path towards the construction of a desired cash culture, but there is still a long way to go, it is also necessary to ensure that the days of accounts receivable are less than the days of accounts payable, as well as strengthening the relationship with the banks to continue looking for alternatives to lighten the cash flow. Being strict with expenses and focusing on projects that are relevant to the situation will help a viable cash culture.