Cash Flow Management at the Beginning of the Year
Cash Flow Management is one of the most important elements that determine a company's ability to sustain and grow. The beginning of the year presents a strategic opportunity to reset cash policies, update forecasts, and establish mechanisms to prevent liquidity crises in the following months. In this article, we present a practical framework for cash flow management at the start of the year, focusing on steps, tools, and performance indicators.
Why is the beginning important?
Having a clear opening balance helps in accurately planning future obligations.
Renewing plans after reviewing the actual performance of the previous year provides more realistic forecasts.
Identifying financing or investment needs early gives time to negotiate with lenders or rearrange capital investment.
Practical Steps for Cash Flow Management at the Beginning of the Year
1. Assess the Opening Cash Position
Take stock of cash and bank balances, short-term investments, and available credit. Identify short-term obligations (salaries, accounts payable, near-term debts).
2. Prepare a Rolling Cash Forecast
Create a rolling cash flow forecast for at least 13 weeks, preferably 12–24 months for strategic monitoring. Make the forecast flexible and update it weekly or monthly.
3. Scenarios: Base, Upside, and Downside
Develop 2–3 scenarios (Base, Upside, Downside) to determine the range of liquidity needed and how to respond to each case (deferring expenses, accelerating collections, drawing from credit lines).
4. Optimize Working Capital
Review customer credit policy: Can payment terms be shortened?
Negotiate with suppliers for better payment terms or credit conditions.
Manage inventory wisely to avoid overstocking and financing it with cash.
5. Review and Schedule Capital Expenditures
Classify CAPEX expenses by priority — Urgent, Important, and Deferred — and link to expected liquidity before approval.
6. Diversify funding sources and activate credit lines
Ensure the availability of credit lines or financial facilities as a safety net. If funding is needed, start negotiating early for better terms.
7. Treasury Policies and Procedures
Set limits on spending authority, a foreign exchange policy, procedures for managing cash surpluses (short-term investments), and a cash reserve policy (e.g., covering 3 months of operating expenses).
8. Implementation and Monitoring Mechanisms
Define clear responsibilities (finance, sales, procurement) and adopt dashboards that display actual flows against the plan, with alerts for significant deviations.
Performance indicators to monitor
Cash Conversion Cycle.
Operating Cash Flow.
Cash to monthly operating expenses ratio (Coverage Ratio).
Average Days Sales Outstanding (DSO) and Average Days Payable Outstanding (DPO).
Level of cash reserves in major currencies.
Common mistakes to avoid at the beginning of the year
Preparing a rigid cash budget that is not updated.
Relying on projected sales without signed agreements or confirmed increases.
Ignoring the impact of inflation or currency fluctuations on costs.
Lack of an emergency scenario or ready credit line.
Quick Checklist for the start of the year
Cash inventory and opening documented account.
Prepare an updated 13-week cash forecast.
Develop 3 scenarios and define a response plan for each.
Review customer and supplier terms and update policies.
Identify CAPEX needs and align them with liquidity.
Verifying credit lines and activating reserve policies.
Creating a periodic monitoring dashboard and defining responsibilities.