We, the people, are the company, and despite doing well, our lack of cash management expertise can lead to a company's liquidity deficit. When this occurs, we know several measures to manage the liquidity gap, however the goal is to prevent it in the first place.

The most common reasons for ineffective cash flow management are:

• insufficient understanding of the cash flow cycle,
• lack of understanding of profit versus cash,
• bad/inadequate capital investments,
• low ability to manage money.

Understanding basic financial concepts and the basics of planning is crucial for effective management of the company's liquidity. Lack of knowledge can lead the company to a liquidity deficit, which means that it does not have enough liquid assets or money to pay its suppliers, employees or other creditors. If the company does not have an understanding of the timing of cash flows, i.e., when inflows and outflows debit the account, financial decisions to make payments can create additional pressure on liquidity.

In practice, we often encounter a misunderstanding of the transfer of profits into money, especially during the company's growth phase. In this phase, companies may show a profit, but they have no money in their bank accounts, as liquidity assets are tied up in working capital. On the other hand, unmanaged investment decisions, especially in the maturity phase, cause an outflow of money into unprofitable projects and thus limit the available funds for financing current operations.

Common to all reasons is that long-term inefficient management of cash flow can lead to long-term illiquidity of the company. If the company is long-term illiquid, the company becomes insolvent in accordance with the Slovenian Financial Operations, Insolvency Proceedings, and Compulsory Dissolution Act. The legal representatives of the company are obliged to take measures to eliminate the insolvency or to propose the bankruptcy of the company. If your company is insolvent in the long term, propose company restructuring.

Effective planning of cash flows (outflows and inflows) is therefore crucial for liquidity. Companies usually use external contractors specialized in financial planning and modelling to establish an internal control system. After the establishment of the internal system, the company smoothly plans and controls the cash flows themselves.

With an effective internal cash flow planning system, the company can avoid short-term illiquidity, as the business can predict when it does not have enough money to pay its due obligations and in accordance with this timely measure. Either agree on decrees for payment to suppliers or for early payments from customers. If agreements are not possible, the usual practice to bridge the short-term gap is to use factoring services or other sources of financing.

The difference between short-term and long-term cash flow planning

When planning cash flows, it is important to distinguish between short-term (current) and long-term (investment) cash flows.

A company's short-term cash flows are a reflection of current operations and reflect liquidity. These include working capital settings, i.e. the best liquid assets that can be quickly turned into cash to pay current liabilities.

Why are we talking about the best liquid assets and what does it mean? In practice, a part of the inventory may appear to be impossible to sell overnight and thus turn into money. To the extent that they are non-current, i.e. they are not part of the best liquid assets such as quick sellable assets, they are not part of the available assets and are excluded from the calculation when determining liquidity. This reduces the balance of liquid assets for the payment of current liabilities.

In practice, short-term cash flow planning is carried out on a daily or weekly basis, while long-term cash flow planning is carried out on a quarterly, half-yearly or annual basis. For the operation of the business, we are interested in the cash balance either on a daily or weekly basis, but the plan depends on the nature of the individual company's business. In short-term cash flow planning, we therefore determine the balance of money per day or week. It is most effective to control and plan cash flows with an established automated financial model, which we complete on a daily/weekly basis, as this is how we predict and take action in advance in the event of a liquidity gap.