What is cash flow and how to manage it with POS

Operating cash flow is one of the most important concepts in treasury management. Calculating cash flow is an essential issue to prevent moments of low liquidity, in which your company would not be able to meet payments.

This is a strategic aspect that your company must control effectively, and one of the best ways to do it is through an ERP system with POS. In this post you will discover how, by keeping track of cash flow, you can improve cost efficiency with an ERP.

What is cash flow?

Operating cash flow is the amount of liquidity generated by the company in its normal operations. It does not measure income and expenses, but rather the flow of cash inflows and outflows in the company.

Thus, for example, a company that has a negative cash flow is losing liquidity in the short term, while if it has a positive cash flow, it means that more cash is coming in than going out, so it is in a state of greater liquidity.

This is, as you can see, a key aspect of risk management in companies. A company with a negative cash flow may not be able to meet its short-term debts, while if it has a large amount of cash flow, it may mean that it is not investing enough, even if it has high liquidity.

It should be noted that cash flow does not include interest on the financing of operations. On the other hand, depreciation of assets is considered. Grants and loans are also included in the cash flow, since they provide liquidity. Accounting provisions, i.e. cash that has been set aside to meet expected payment obligations, are also included.

Cash flow ultimately provides information on the company's ability to pay in the short term. When payroll is paid, payments are made to suppliers or a purchase of materials is made, these are cash flow outflows. Payments that are still pending are not considered here, for example if we buy machinery and this is paid in installments.

How to control cash flow efficiently

We have already shown you what cash flow is. To control it efficiently, it is now essential to know how to calculate it. This can be done with a simple formula:

Cash flow = Earnings before interest and taxes + Depreciation + Amortization + Provisions + Accounts payable - Accounts receivable.

If you are wondering how to improve cash flow, you should implement a software tool that allows you to calculate each of these elements in an automated way.

A financial management program, with POS and treasury management, provides us with information on the state of our liquidity, what profits we have obtained, what payment obligations we have in the short term, what the level of delinquency is and how our assets have been depreciated.

Through this type of tool, it is possible to determine whether we have a positive or negative cash flow. That is, if the inflows of funds are greater than the outflows, or vice versa. The fact of having real-time information through an ERP, in which all daily transactions are recorded, allows us to access detailed liquidity reports and check our financial status.

Advantages of using technology for financial control

ERP software solutions with POS management provide important advantages for cash control.
  • They provide real-time information: you don't have to run reports manually and check cash inflows and outflows in your bank account to evaluate your cash flow.
  • Helps prevent non-payments: with ERP software you can be informed of when payments are due, and even schedule payment orders to avoid being charged penalties.
  • Improve your financial decisions: for example, if your suppliers' payment terms are 30 days, but your customers have a payment term of 60 days, having this information helps you make decisions to seek short-term financing.
  • Evaluate your liquidity: knowing your cash flow allows you to consider the best way to acquire new assets or inputs, depending on whether you have enough liquidity to meet the payment, or if it is better to request a payment in installments or ask for a credit.
How to optimize cash flow with ERP?

When we talk about cash flow, we see that there are several types of elements to control. On the one hand, the revenues that are produced on a daily basis, as well as sales with due dates. But also the expenses and the dates on which a payment must be made.

ERP is the business management tool that best helps you with cash management. Every time a sale is made, the payment is updated in your management software. It allows you to see in real time what payment obligations you have in the short term, and which customers owe you money and when they are going to pay. You can also perform automated bank reconciliation, which allows you to check that bank transactions are the same.

With an ERP you can monitor the average time between a sale and payment. This helps you make short-term financial decisions, or change your strategy to look for new suppliers with longer payment terms, shorten payment terms to your customers.

An ERP software also has Business Intelligence tools, which allow you to make simulations to make provisions for future payments. If you know which days you have to make a payment, you can reserve cash for that payment in advance, so that it is not used for other purposes.

Cash flow and digital POS

The advantage of ERP for cash flow management is that it integrates with your digital POS. In this way, your revenues are updated in an automated way. Every time an invoice with a due date is generated, this data is also recorded, so you can have a complete overview of what the cash flow status is going to be at any given moment, according to the forecasts.