Challenge Accelerator Workshop: Access to funding

‘Cash flow planning is crucial for business continuity’

Published in Climate Action & Learning by

Make a cash flow plan for at least three years, with at least a monthly planning for the first year. And include convincing arguments why your cash flow will actually develop as you’ve planned. This was the main advice of financial expert Joost Verheijen in his introduction to cash flow planning during the first bootcamp of the Climate Action Challenge accelerator programme.

Verheijen started his own consultancy, ​​​​J.A.G. Sustainable Finance, two years ago building on 25-years working experience in the financial sector. Together with financial expert Nicole van Putten, he was invited to help the challenge winners with their cash flow planning or liquidity plans.

In his introduction, Verheijen defined cash flow planning as ‘an overview of actual payments and receipts per period’. Defining the period and taking into account the timing of incoming and outgoing cash is crucial in a good liquidity plan, Verheijen explained. ‘You not only need to know how much money is coming in and going out, but you also need to know when this is happening.’

Reasons why

That’s indeed the first reason to have an accurate cash flow plan: to be prepared and make sure you don’t run out of money. Other reasons are:

– to be aware of where your cash is going
– to be able to monitor if reality is evolving as you had planned
– to determine the need for external finance (loans, investments)
– to convince possible investors
– cash is King; Verheijen: ‘You need cash for your operations, while money stored in for instance real estate or other fixed assets can’t be used otherwise.’

Operational cash flow

In his talk Verheijen discerned three types of cash flow: operational, investment and financial. ‘Operational cash flow tells you exactly how much money goes in and out your operations,’ Verheijen explained.

Incoming money (sources) on this level comes from debtors, i.e. sales. Verheijen: ‘This is based on your expected sales. But you  also need to take into account the payment periods you agreed upon with your debtors. In addition, you should also reckon with debtors who don’t pay in time, or sometimes not at all.’

Another important operational cash inflow is VAT. Cash that flows out makes a much longer list and can be divided into variable costs and fixed costs. The variable costs are related to production and business activity. These include for example raw materials, processing costs, transport costs and variable personnel, as well as VAT. Here again the payment periods are very important.

The fixed costs include fixed personnel costs and general costs like for marketing, office, IT, administration, consultants, travel costs, and maintenance. Furthermore, management fees, VAT and income and corporate taxes add to out-going money. Finally, Verheijen advised to always calculate in a percentage of unforeseen costs.

Investment and financial cash flow

Investment cash flow includes all capital expenditure and sales of equipment and other fixed assets. Financial cash flow maps available cash, finance and interest income on the incoming side and interest payments, dividend and loan repayments on the outgoing side.

‘When compiling a liquidity plan I would recommend to start with the operational and investment cash flow,’ Verheijen said. ‘The financial cash flow will follow from that, because the first two will show you how much financing you need.’

Profit & Loss

Verheijen next discussed the difference between cash flow and the profit & loss statement that every company has to draw up after a given year. Here timing plays a big role. Verheijen: ‘There is usually a difference between the moment of sales and the moment of payment by the debtors. That’s why cash flow is about when money actually comes in and goes out, while the profit & loss statement looks at the profit that has been made. Stock can have huge impact on your cash flow. In the profit & loss statement you also calculate in non-cash items including depreciation of assets (computers, machines, etc.), results in participations (stocks you own), provisions for things that might happen in future (a reorganisation, maintenance of a building) and deferred taxes.’

Sometimes, Verheijen added, finance or provision of cash can be within the business model. ‘If you take supermarkets: they purchase goods that usually are paid for later, while money is coming in the moment they sell them. So, they sell the products before they have to pay them, which provides them with a source of finance’.

Cash flow planning

Finally, Verheijen gave several recommendations for making a cash flow plan. On the time span of such a plan, he said: ‘The number of projected years depends on your specific business case, but in general I would recommend to make a plan for at least three years, and make a monthly planning for at least the first year. A monthly plan helps you to oversee seasonal effects if your product sales are depending on the seasons.’

Verheijen also stressed the importance of separating one-off starting costs and continuous operating costs. He recommended to start the planning with turnover and receipts, and next to calculate costs (variable and fixed) while taking into account credit timing.

Concluding, he advised the participants to work with scenarios. ‘Make a scenario for a management case in which you should be ambitious, but avoid a hockey stick curve. Also make a more conservative base case scenario. In any case you have to come up with convincing arguments why you think your cash flow will develop as planned. This is especially important when you talk to potential investors, because they will want to know whether your planning is solid enough to justify their investment.’

Joost Verheijen advising on the Scrappy News Weather Report project.

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