5 min

What is accounts receivable reconciliation?

Author
Naomi Goldberg
Published
Nov 13
2024

Key Takeaways:

  1. Accounts receivable reconciliation is the process of ensuring that the amounts recorded in a company’s ledger match the actual payments received.
  2. Regular reconciliation helps identify discrepancies, reduce errors, and maintain accurate financial records for better cash flow management.
  3. Manual processes can lead to inefficiencies and errors, highlighting the need for automation to streamline this critical function.
  4. Automated AR reconciliation tools save time, improve accuracy, and provide real-time insights into receivables, enabling businesses to focus on collections and cash flow optimization.

Accounts receivable reconciliation, also known as cash application, is when you match outstanding customer invoices with the money received. This process ensures all payments are recorded and accounted for correctly in the company’s books. Reconciliation is essential for keeping accurate financial records and to correctly assess and manage cash flow.

Why is AR Reconciliation Important?

Conducting accounts receivable (AR) reconciliation provides accurate and reliable financial records by matching invoices with payments. This helps finance teams identify and address any discrepancies, stay compliant with financial reporting standards, and give stakeholders a transparent view of the company’s financial position.

AR reconciliation also enhances cash flow management by showing outstanding receivables and allowing finance leadership to address late payments and alter their collections processes.

On a strategic level, AR reconciliation gives business executives the tools to make more informed decisions about credit policies, customer relationships, and risk management, all of which allow the organization to meet profit goals.

General Ledger, Sub-Ledgers & Double-Entry Bookkeeping

There are three elements involved in recording accounts receivable: the general ledger, sub-ledgers, and double-entry bookkeeping. 

The general ledger is the central record that lists an organization's financial data and all transactional information.. 

Sub-ledgers are records of individual transactions that allow accountants to manage and reconcile specific entries or specific customer accounts.

Double-entry bookkeeping utilizes both general ledgers and sub-ledgers so that each transaction is recorded in at least two accounts. Having two records of transactions makes it easier to spot missing or incorrect data and quickly address the issue.  With double-entry bookkeeping, accountants keep meticulous financial records that protect them from everything from fraud to noncompliance.  

Step-by-Step Guide to Performing Accounts Receivable Reconciliation

Here’s a breakdown of how accounts receivable reconciliation works:

  1. Collect all relevant data:  Gather documents such as customer invoices, payment receipts, bank statements, and any other relevant financial records. Verify that these documents are correct and up to date.
  2. Review the accounts receivable ledger: Examine the accounts receivable ledger for outstanding balances. Then, check this information against customer account statements to ensure all recorded transactions are accurate and complete.
  3. Compare invoices to payments received: Match each customer invoice with bank statement payments. Flag instances where payments were incorrectly allocated or missing.
  4. Identify and investigate discrepancies: Analyze any inconsistencies between invoices and receipts. This may involve looking at invoice numbers, dates, and amounts. Reach out to customers or financial institutions to resolve any issues. 
  5. Adjust and rectify records: Tweak your records to reconcile issues by correcting errors in data entry, updating transaction dates, or reassigning payments to the correct accounts.
  6. Document the reconciliation process: Maintain detailed documentation of the reconciliation process, noting discrepancies and how you resolved them. Keep all records on hand in case of audits or future reconciliation activities.
  7. Review and approve: After making adjustments, conduct a final review of the reconciled accounts, reviewing your work.. Submit the reconciliation for approval with the relevant company executive to validate the financial statements.

Challenges in Accounts Receivable Reconciliation

While accounts receivable reconciliation is crucial for financial accuracy, it does come with challenges, such as:

  • Inefficient processes: Manual account reconciliation is time-consuming, especially for businesses with large transaction volumes. 
  • Data entry errors: Accounting for high volumes of transactions, which can lead to data entry errors or missed entries. 
  • No standardization: Manual methods usually don’t have a standard reconciliation process for every department, leading to inconsistencies and errors. 
  • Risk issues: By only looking at matching the fields and ignoring patterns in the data, businesses can miss potential fraud.
  • Lack of visibility: Dealing with huge volumes of data makes it more difficult to track all the changes made in the reconciliation process, especially with multiple stakeholders. Lack of visibility and accountability can result in disconnected spreadsheets, more bottlenecks, and potential errors.  
  • Different payment terms: Differing customer payment terms and methods can complicate the reconciliation process.

Tips for Smooth AR Reconciliation 

Consider implementing the following tips for a smooth and efficient AR reconciliation process. 

  1. Use a checklist that outlines all the steps and data required for the reconciliation process. This ensures consistency in every cycle and within every department. 
  2. Coordinate with all relevant team members to ensure they understand their roles in the reconciliation process.
  3. Strategically time reconciliations with your business cycle and financial reporting requirements for timely insights.
  4. Use advanced software that can show reconciliation data in an intuitive way to help identify patterns or anomalies that may not be obvious in traditional spreadsheet formats.
  5. Use the insights from resolving discrepancies to optimize your reconciliation processes and business practices. This could mean updating reconciliation checklists, improving data collection methods, or fixing communication issues among team members.

When to Perform Accounts Receivable Reconciliation

Typically, companies perform monthly reconciliations as part of the closing process. When to perform AR reconciliation can also depend on factors such as significant changes in monthly sales volume, or a large influx of payments. In these situations, a more frequent reconciliation schedule might be more advantageous.

For the most accurate and compliant records, you may want to prioritize AR reconciliation during audits, or when preparing for tax filings. Strategically timing these activities will help you quickly flag and correct inaccuracies, improving operations and financial transparency.

Smart, Ai driven AR Reconciliation

Panax automates AR Reconciliation, so lean finance teams with complex treasury needs can work more efficiently, and with less data errors. Panax’s proactive, automated matching cash application uses AI driven algorithms to take the workload off, but leaves you full control over the final approval. The matched transactions in Panax are automatically created back into the ERP, so your books are up to date. 

To get a personalized demo of AR Reconciliation within Panax, click here

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Cash Forecasting
12-Month cash flow forecast explained

A 12-month cash flow forecast is a financial tool businesses use to project their cash inflows and outflows over the course of a year (ie,how high its income and expenses during the year).This forecast helps companies anticipate future cash movements, reduce financial risks and create financial long term financial plans. 

For example, a 12-month rolling forecast could be January through December 2025. When January 2026’s results are finalized, you could replace it with January 2027. The forecast encompasses 12 months, but slides forward every month.

Why is a 12-month cash forecast important for businesses?

While shorter time frames such as a 13-week cash flow forecast or monthly updates provide valuable short term insights, a 12-month cash flow forecast provides a comprehensive view that can bolster long-term strategic planning. A 12-month forecast leaves room for seasonal fluctuations in cash inflows and outflows. Understanding these patterns allows you to strategically allocate resources, prepare for potential downswings, and capitalize on peak periods.

A year-long forecast also provides the extended visibility needed for informed capital expenditure planning and investment decisions. It gives your business the foresight to align funding strategies with projected cash availability, supporting sustainable growth and expansion.  Over a 12-month horizon, companies can predict and mitigate cash shortages, enabling operational agility and financial stability. This is especially important for companies looking at longer term, large financial events, such as mergers, acquisitions or raising capital.

A 12-month cash flow forecast provides a comprehensive view that can bolster long-term strategic planning

How does a 12-month cash flow forecast work?

Creating a 12-month cash flow forecast is actually pretty simple; Businesses must compare the expected income with the expected expenditure for each month. Then, they’ll subtract the expenses from the income, showing whether the expenses exceeds the income or if the month ended in a surplus or deficit.

In order to make those calculations, you must gather historical data (e.g. all revenue and expenses). To make these types of forecasts more accurate, companies may pull their ERP data from the last year.

Revenue might include:

  • Customer payments
  • Cash sales
  • Subsidies and other funding
  • Tax refunds 
  • Income from financial investments
  • Income from licenses or patents 

Expenditures might include:

  • Employee salaries
  • Rent for office spaces, warehouses, and/or production halls
  • Supplier payments
  • Software license fees 
  • Operating costs such as water, electricity, internet, and so on
  • Insurances 
  • Marketing costs

Typically 12-month forecasts—which include rolling updates— segment revenue and expenses into three primary components: operating activities, investing activities, and financing activities.

Operating Activities

  • Revenues: Sales revenue, service income, accounts receivable collections
  • Expenses: Salaries and wages, rent, utility bills, supplies, and accounts payable disbursements

Investing Activities

  • Revenues: Sale of fixed assets, dividends from investments
  • Expenses: Purchase of equipment, investment in securities, capital expenditures

Financing Activities

  • Revenues: Proceeds from loans, issuance of shares or bonds
  • Expenses: Loan repayments, dividend payments, share buybacks

All three components show businesses where cash originates from and how it is utilized. A rolling 12-month forecast gives a  continuous and forward-looking view of their cash dynamics, a vital part of strategic planning and financial stability.

Three tips for creating a 12 month forecast

  1. Remember the company’s mission: Rolling forecasts tend to be more successful when it’s aligned to the company’s objectives and goals.
  2. Invest in the right tools: spreadsheets passed from department to department could lead to disjointed and error-prone documentation. Consider a flexible forecasting software that will increase accuracy and save resources.
  3. Adjust forecasts as necessary: Revisit the forecast and compare it to actual results so you can make adjustments.

How often should a cash flow forecast be updated?

Regularly updating cash flow forecasts is crucial for effective financial management. Ideally, businesses should update cash flow forecasts monthly, or even weekly to reflect the most up-to-date financial data and to accommodate any changes in market conditions or business operations. 

To control liquidity and accurately forecast, especially in uncertain economic periods, companies may even want to create several versions of their forecast. This means that they are able to compare scenarios, and accurately run scenario planning. 

This practice helps identify potential liquidity issues early so businesses can proactively  make informed financial decisions. Regular forecast updates not only track business performance, but also ensure that strategic plans align with current financial realities.

For example, if businesses see unplanned or unexplained discrepancies between forecasted and actual cash flows, they can correct them to maintain accuracy.

An Easier Way to Build 12-Month Forecasts

A 12-month cash flow forecast provides critical insight into a business’s financial health during a significant period of time, which provides enough data to better prepare for uncertainties and exercise  strategic decision-making.

Though Excel can create 12-month forecasts, the process is very manual, time-consuming and prone to human errors. Excel also doesn’t make it easy for teams to collaborate, to grant permissions to different people in different teams, or to easily share reporting. 

Panax offers an AI-driven cash management platform for lean finance teams with complex treasury needs. Panax's automation and AI makes categorizing transactions easier and quicker, and creates fuller data for forecasting. Panax offers weekly, monthly and long term forecasts based on ERP data and AI algorithms, offering flexibility to pull the relevant data into your forecast, and update it with ease. All together it makes it easy to forecast for your company, so you can optimize liquidity and work more efficiently.

Want to learn more about how Panax’s flexible forecasting can help you and your team work better? Get a demo today

5 min
Cash Forecasting
Cash flow statement vs cash flow forecasting

Luckily with a solid grasp of cash flow management, your company can meet operational needs and capitalize on growth opportunities. For the next several minutes, we’ll look at two action items that help maintain an advantageous capital supply: Cash flow statements and cash flow forecasting.

What is a cash flow statement?

A cash flow statement is a historical view of cash inflows and outflows over a specific period. Businesses use cash flow statements to help assess past performance, while data informs future strategies and ensures accurate financial records. 

What is cash flow forecasting?

Cash flow forecasting uses the company’s historical financial data to identify potential surpluses or shortages and adjust spending as necessary.  

Ultimately, cash flow statements and cash flow forecasting support daily operations as well as long-term growth and sustainability.

A cash flow statement offers a historical perspective on a company's cash movements, while cash flow forecasting anticipates future cash needs to guide strategic planning.

What’s included in a cash flow statement?

There are three main components of cash flow statements: operating, investing, and financing activities. Here’s a breakdown of each.


Operating Activities

The operating activities section details the core revenue activities of a company, ie cash flows directly related to the production and sale of goods and services. Operating activities help gauge operational efficiency and profitability by specifying: 

  • Cash received from customers
  • Cash paid to suppliers and employees
  • Other operational expenses and income

The operating activities section allows you to assess the company's ability to generate positive cash flow in the short term, which is essential for maintaining liquidity to meet its obligations. 

Investing Activities

Investing activities capture cash flows related to the acquisition and disposal of long-term assets and investments—for example, new machinery, technology, or business acquisitions. Investing activities should also note any: 

  • Purchases of property, plant, and equipment (PPE)
  • Sales of long-term investments
  • Loans provided to or received from other entities

Investing activities help gauge how the company allocates resources for long-term growth. For example, are you spending more on acquiring assets or divesting? This provides insights into the strategic direction and potential future revenue streams. 

Financing Activities

The financing activities section highlights transactions with the company's owners and creditors to fund:

  • Proceeds from issuing shares
  • Repayment of borrowings
  • Dividend payments to shareholders

This section highlights the reliance on external financing, such as loans or issuing shares, and the capability to repay borrowings and distribute dividends. This section is pivotal for risk management as it indicates the company's ability to manage debt and inform financial risk strategies.

What are the types of cash flow forecasts?

There are several types of cash flow forecasting, all of which can enhance your company's financial planning and stability. Let's explore the three main types.

Scenario analysis is the creation of different financial situations based on potential events. It helps you understand how various occurrences—like economic downturns, market shifts, or changes in your business operations—might impact your cash flow. By evaluating best-case, worst-case, and most-likely scenarios, you can prepare more robust financial strategies. 

Rolling forecasts are dynamic and continuously updated. Unlike traditional static forecasts that cover a fixed period, rolling forecasts extend beyond this set timeframe. They adjust as new data comes in, providing a real-time view of future cash flows. This allows companies to be more agile and responsive to changing business conditions. 

Sensitivity analysis assesses the impact changing key variables have on your forecast. By tweaking variables like sales volume, cost of goods sold, or interest rates, you can see how sensitive your cash flow is to these changes. This method helps pinpoint the most critical factors affecting your financial health and supports more informed decision-making. 

What’s included in cash flow forecasts?

Cash flow forecasts should contain four main categories of information: expected income, projected dates for receiving that income, expected costs, and projected dates for when costs are incurred. More specifically, cash flow forecasts include:

  • Opening balance: The balance at the beginning of the forecast period 
  • Receipts: Income from sales, interest, and asset sales, broken down by item 
  • Total receipts: The total amount of receipts 
  • Payments: Expenses from materials, wages, marketing, and so on broken down by cash flow item 
  • Total payments: The total amount of payments 
  • Net movement: The difference between the total amount of cash a company receives (cash inflows) and the total amount of cash it spends (cash outflows) during a specific period, either by individual item or total 
  • Closing balance: The balance at the end of the forecast period 
  • Projected dates: The projected dates for when income will be received and costs will be incurred 
  • Non-sales income: Income from sources like tax refunds, grants, investments, and royalties

Cash flow forecasting is critical to several key areas of the business’s financial operations such as resource allocation, capital structure planning, and supporting growth initiatives. Here’s why: 

1. Resource allocation: By predicting future cash flows, businesses can allocate resources more effectively, ensuring that funds are available for operations, investments, and unexpected expenses. 

2. Capital structure planning: Accurate forecasts allow companies to plan their capital structure—balancing debt and equity—to maintain financial stability and minimize costs. For example, a forecast that highlights periods of high cash outflows might prompt a company to seek additional financing or adjust its debt repayment schedule. 

3. Supporting growth initiatives: Forecasting enables companies to anticipate growth needs and plan accordingly. This means ensuring that sufficient cash is available for projects, such as market expansion, R&D, and acquisitions, thus supporting long-term growth objectives

Real-life examples of cash flow forecasting & cash flow statements 

Before looking at what these two essential financial tools look like in real scenarios, here’s a recap of their definitions: cash flow statements are a historical view of where your money has been. Cash flow forecasting shows where your money will be. 

By combining these tools, you get a comprehensive picture of past performance and potential future outcomes, making it easier to plan for growth and navigate the complexities of the mid-market landscape. Let’s look into how cash flow statements and cash flow forecasts play out in the following scenarios:

  • New product launch
  • Seasonal market fluctuations 
  • Expansion into new markets 
  • Economic downturns

New product launch: Imagine your mid-market company launches a new product. The cash flow statement reveals the previous costs of similar product launches and the generated revenue.  With this information, you can use the cash flow forecast to predict future cash inflows and outflows, helping you plan for the necessary working capital and anticipate any shortfalls. 

Managing seasonal fluctuations: By examining cash flow statements, you can identify financial patterns during different seasons—higher sales in summer and lower in winter. Using this data, your cash flow forecast will cover expenses in off-peak times and make the most out of peak periods. 

Expansion into new markets: If your growth company is considering an expansion into new markets, cash flow statements can highlight how previous expansions impacted cash flow. Metrics like initial overheads, marketing spend, and time to breakeven are shown. Leveraging these insights in your cash flow forecast helps gauge the potential financial impact, thereby informing budget allocations and risk management strategies. 

Economic downturns: During economic downturns, historical cash flow statements can provide critical insights into how your company managed cash in previous crises. In this circumstance, forecasts will likely include strategies such as cutting non-essential expenses, securing lines of credit, or delaying capital expenditures for liquidity and operational stability.

Applying cash flow statements & forecasting to growth strategies

Effective growth planning hinges on cash flow statements and cash flow forecasting. Let's briefly touch on how these financial tools can be game-changers for your strategy. 

Managing expansion risks: Analyzing cash flow statements allows growth and mid-market companies to learn from past inconsistencies and make informed decisions to avoid similar pitfalls. On the other hand, cash flow forecasting helps you anticipate potential cash shortages and prepare contingency plans in advance. 

Optimizing Cash Reserves: Understanding your cash inflows and outflows through detailed cash flow statements sets the stage for optimizing cash reserves. This historical data can highlight periods of high liquidity, making a solid case for when to accumulate cash reserves. Forecasting takes this a step further by predicting future cash positions, enabling you to take proactive actions such as short-term investments or debt repayments during times of surplus. 

Financing Growth: Cash flow statements help you demonstrate financial health to potential investors and lenders by showcasing your ability to generate and manage cash effectively. To strengthen your pitch, cash flow forecasting projects how additional funds will be utilized and the expected returns. Together, they provide a compelling case for securing funding for expansion initiatives. 

By harnessing the insights from both cash flow statements and cash flow forecasting, businesses can navigate growth with greater confidence, ensuring a balance between aggressive expansion and financial management.

Quick tips for capital efficiency

You can achieve working capital efficiency by focusing on three areas: implementing working capital management across the organization, leveraging technology, and reviewing risk management policies. 

  1. Implementing working capital management across the organization

Make an organization-wide effort to consider the cost of working capital when making decisions. This ensures that each team understands its impact on working capital and is aligned with company goals. For instance, companies can use key performance indicators (KPIs) such as days sales outstanding (DSO) and days payable outstanding (DPO) to assess performance at different levels and departments. This allows the organization to track progress. 

  1. Leveraging technology

In 2024 and 2025, many companies will swap human-error-prone tools like Excel for advanced technology such as Machine Learning (ML) and predictive analytics to boost operational cash flow forecast accuracy. Utilizing real-time data and analysis within your tech stack allows the business to adjust liquidity, risk, and funding strategies to meet current or future demands. 

  1. Reviewing risk management policies

To get the most out of cash management solutions, review your risk management policies to ensure nothing slips between the cracks. Ideally, businesses review risk management policies at least once a year, though changing markets may necessitate more frequent reviews to address potential challenges.  

A better way to manage cash flow

Combining cash flow statements and forecasting allows you to assess past performance while predicting future financial health for better decision-making and resource allocation. This integration can help your business navigate uncertainties and seize growth opportunities effectively.

However, modern cash management faces several challenges.

  • Reliance on Excel: Using Excel for cash management can lead to errors and inefficiencies due to manual inputs and a lack of real-time data.
  • Poor Visibility: Limited visibility into cash flows can hinder a business's ability to make informed decisions, leaving them reactive rather than proactive.

Fortunately, solutions like Panax can significantly alleviate these challenges. 

Panax offers a comprehensive suite of tools designed to automate and streamline your cash management processes. With advanced features like customizable templates, automated data entry, and real-time updates, Panax removes reliance on cumbersome spreadsheets, reducing human error and streamlining your processes.  

Get in contact today to see how Panax can provide full visbility into your cash managementFor any business, understanding financial health is critical. In fact, 97% of CFOs make cash and liquidity management a key focus with many finding new ways to alleviate challenges such as relying on Excel or using tools with poor visibility into finances. 

5 min
Cash Forecasting
What is a cash flow statement?

A Cash Flow Statement (CFS) is an important financial document for any business. It summarizes how money moves in and out over a specific accounting period. Unlike other financial statements, it doesn’t just track profits or losses but provides a real-time snapshot of liquidity—the funds a company has available. By highlighting the sources and cash usages, this statement is indispensable when understanding a company's operational efficiency and financial solvency.


Why a Cash Flow Statement is Important

Tracking a company's inflows and outflows of cash is crucial for several reasons:

1. It provides spending details: A CFS allows businesses to understand their actual financial position by categorizing where the money is coming from (eg operating activities, investing activities, or financing activities) and where it’s going. 

2. It helps with short-term planning: By following the trail of cash, businesses can better forecast future cash flows and create more suitable strategies for debt repayment, capital investments, or dividend distributions. 

3. It maintains optimum cash balance: It is important for the company toknow if too much cash is underutilized or if there’s a shortage of funds. If the business has excess cash they can use it to invest in shares or buy inventory. If there is a funds shortage, the company can look for areas to borrow funds to keep the business operating.

4. Companies can focus on generating cash: There are several ways to generate cash aside from profit. For example, when a company finds a way to save on equipment, it generates cash. Every time it collects receivables from its customers ahead of schedule, it is gaining cash.

Ultimately, a cash flow statement is both a historical and predictive tool that enhances financial planning and ensures the company has enough liquidity to meet its obligations and continue on the path of sustainable growth.

Breaking Down the Components: Operating, Investing, and Financing Activities

Let's dive deeper into the cash flow statement’s three core parts: operating activities, investing activities, and financing activities.

Operating Activities

This section shows the cash earned from the company’s daily business operations, showing the firm’s profitability. You’ll likely see cash receipts from sales of goods and services, cash payments to suppliers, and cash paid to employees. In essence, operating activities show how efficiently the company can turn its goods and services into cash.

Investing Activities

Investing activities outline the cash used related to the company’s investments. This typically includes transactions related to the purchase or sale of long-term assets and other business investments. For example, if a company buys real estate, equipment, or patents, these transactions are reflected here.

Proceeds from sales also fall under investing activities. This section shows how a company allocates funds towards its growth and expansion efforts, focused on capital expenditures.

Financing Activities

Financing activities on a cash flow statement detail how the company funds its operations and growth through various external sources, such as transactions with the company's owners and creditors, cash inflows from raising capital (issuing stocks or taking out loans), and cash outflows for repaying borrowed funds or distributing dividends. 

The financing activities section helps you understand the financial strategies a business employs to sustain and expand its operations.

How to Read A Cash Flow Statement 

 One of the biggest benefits of preparing a cash flow statement is that it allows you to understand current amount of cash and/or the increase or decrease in cash over a certain time period. Here’s what this can look like:

  1. Cash at beginning of period: The amount of cash your company has at the start of the fiscal period. This equals the ending cash balance from the previous fiscal period.
  2. Cash at end of period: The amount of cash your company has at the end of the current fiscal period.
  3. Change in cash: The amount your company's cash balance increases or decreases during an accounting period. To determine this, calculate the difference in cash from your previous period to the current one.

What Can A Cash Flow Statement Tell You?

A cash flow statement can answer the following questions regarding your cash movements:

  • When is there a cash flow surplus?
  • What do you do with excess cash when you have it?
  • When do you have a cash flow shortfall?
  • What happens during a shortfall?
  • How are current growth plans performing?
  • What happens if another pandemic or disaster were to occur? 
  • Would your business be able to handle that? For how long? How much of a drop in revenue can you handle? 

How to Prepare a Cash Flow Statement: A Step-by-Step Guide

Creating a cash flow statement may seem daunting at first, but breaking it down into manageable steps can simplify the process. Here's a step-by-step guide to preparing an effective cash flow statement for your business:

1. Gather Financial Statements

To create a cash flow statement you'll need the current and previous periods’ balance sheets, income statements, and retained earnings reports. These documents provide you with a historical snapshot of your financial activities.

Once you've gathered these financial statements look for trends such as regular expenses, steady income, and investments that will influence your cash flow statement. These documents serve as the foundation of your analysis, capturing the financial movements that ultimately flow into your CFS.

2. Determine Reporting Period

Establish whether the cash flow statement will cover a month, a quarter, or a year. These dates will depend on regulatory requirements.

Ensure you remain consistent in reporting periods across all financial statements to maintain accuracy and comparability with previous periods.

3. Choose a Method (Direct vs Indirect)

Decide whether to use the direct or indirect method to prepare the CFS

Direct Method vs Indirect Method

The direct method is straightforward. It involves listing all cash collections and disbursements during the period, giving you a clear view of actual cash inflow and outflow from operations. This also makes it easy for stakeholders to understand inflow and outflow. The direct method can be quite time-consuming because it requires detailed records of all cash transactions.

Pros of the Direct Method:

  • Provides a clear picture of cash flow from operations
  • Helps improve cash management and planning

Cons of the Direct Method:

  • Time-consuming to prepare due to detailed data requirements
  • Less commonly used, may not align with standard internal reporting

The indirect method starts with the net income and makes adjustments for non-cash transactions, changes in working capital, and other items. This method is more popular because it's less complex to prepare; companies often have the data readily available through their financial statements. Yet, it may be less intuitive for someone trying to track exact cash movements.

Pros of the Indirect Method:

  • Easier to prepare and widely used
  • Less detailed data requirements
  • Compatible with other financial statements, as it starts with net income

Cons of the Indirect Method:

  • Doesn't show actual cash flows from operating activities as clearly
  • Can be more complicated for readers to comprehend cash inflows and outflows

Cash Flow Statement Example

Section Item Amount ($)
Operating activities Cash received from customers 1,500,000
Cash paid to suppliers and employees 8,000,000
Definition Cash generated from operations 7,000,000
Investing activities Purchase of equipment 2,000,000
Proceeds from sale of assets 1,500,000
Financing activities Proceeds from issuing shares 3,000,000
Repayment of borrowings 1,000,000
Net increase in cash 8,500,000
Opening cash balance 1,070,000
Closing cash balance 1,920,000


Excel Resources for Cash Flow Statement Preparation

Advanced Issues with Cash Flow Statement Preparation

Interest Payments

When preparing a cash flow statement, knowing how to classify interest payments or expenses is vital. These can be categorized under operating activities or financing activities, depending on the accounting standards or policies the business adopts.

Under operating activities: In many systems, like the US GAAP, interest paid is included in the operating activities section of the cash flow statement. This categorization is based on the notion that interest payments are a regular business expense.

Under financing activities: Alternatively, the International Financial Reporting Standards (IFRS) give entities the choice to classify interest payments as either operating or financing activities. When classified under financing activities, interest payments reflect the cost of obtaining financial resources.

Ultimately, the classification of interest payments can have a significant impact on the company’s cash flow analysis, influencing perceived liquidity and financial strategies. It is essential to be consistent with the classification to ensure clarity and comparability in financial reporting.

Depreciation:

Depreciation may appear as a non-cash expense in the cash flow statement, particularly when using the indirect method. Located in the operating activities section, depreciation adjustments help reconcile net income to net cash flow from operating activities.

Within the cash flow statement, depreciation appears as an addition to net income when using the indirect method. This occurs because depreciation expenses reduce net income but do not involve actual outflows of cash.

How it affects the cash flow statement: Depreciation increases the net cash from operating activities. Since depreciation is a non-cash item, it's added back to the net income to reflect the true cash flow, counteracting the reduction in net income caused by depreciation.
This adjustment ensures users of the statement see a clear picture of cash generated from operations, separate from book expenses like depreciation.

Dividends

Dividends are a form of profit distribution to shareholders that appear under the financing activities section of the CFS. This classification is essential as it reflects a company's strategy in returning value to its investors.

Dividends impact the overall cash position of the business. By including dividends in the financing section, the CFS provides insights into how a company manages its financial obligations and shareholder relations.

  • Cash Outflows: Dividends represent a business’s cash outflows . When a company decides to pay dividends, this amount reduces the available cash within the company, impacting its financing activities.
  • Financial health indicator: Regular dividend payments indicate financial stability and a company's confidence in its ongoing cash flow generation. A halt or reduction in dividend payments might raise concerns about the company's cash reserves or profitability.
  • Regulatory differences: It's also important to note that under generally accepted accounting principles (GAAP), paid dividends are included under financing activities. However, under International Financial Reporting Standards (IFRS), dividends may sometimes be reported within operating activities, depending on the company's accounting policies and practices.

Understanding the placement and impact of dividends on the cash flow statement is crucial because it provides valuable insights into a company's financial strategies and priorities concerning shareholder distributions.

Cash Flow Statement vs Income Statement vs Balance Statement

Understanding the distinctions between the cash flow statement, income statement, and balance sheet is important for comprehensive financial analysis. Though distinct, they all contribute to  a company's financial health portrayal.

Cash flow statement: This statement highlights the inflow and outflow of cash within a business, demonstrating its ability to manage cash efficiently for operations, investments, and financing. By focusing exclusively on cash movements, it helps assess liquidity and cash management practices.

Income statement: Also known as the profit and loss statement, this provides a summary of revenue, expenses, and profits over a specific period. It operates on an accrual basis, depicting the profitability and operational performance. Income  statements may not always reflect current cash conditions.

Balance sheet: This offers a snapshot of a company’s financial position at a particular point in time. It displays assets, liabilities, and shareholders' equity, illustrating what the company owns and owes, along with the invested capital. This allows businesses to analyze the company's net worth and financial structure.

These statements complement each other by providing a full view of the company's financial picture. The income statement shows profitability, which impacts the cash flow statement as it affects cash from operations. The balance sheet, however, records assets and liabilities directly connected to cash flow activities, such as changes in inventory or receivables.

Together, they paint a detailed picture of performance, financial position, and liquidity analysis. This triangulated approach is essential for assessing profitability, financial stability, and growth potential.

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Working Capital
What is working capital management?

Working capital is the difference between a company’s current assets (e.g., cash, inventory, accounts receivable) and current liabilities (e.g., accounts payable, short-term loans).

The formula is simple:

Working Capital = Current Assets – Current Liabilities

Working capital management is the process of managing these resources to meet short-term obligations and remain operational.

Simple Example:

Imagine a small retail business. Their inventory (current asset) is worth $50,000, while their accounts payable (current liability) sits at $30,000. Their working capital is $20,000. If they poorly manage accounts payable or overstock their inventory, they risk liquidity issues that could jeopardize daily operations.

Why businesses need to manage working capital effectively

Proper working capital management ensures financial stability. It’s a balancing act—too much working capital may suggest inefficiency, while too little can lead to liquidity crises. Effective management provides the flexibility to meet immediate financial obligations and invest in growth opportunities.

The link to cash flow optimization

Working capital management is inextricably tied to cash flow. By optimizing accounts receivable, accounts payable, and inventory, businesses can accelerate their cash conversion cycle (CCC)—the time it takes to convert investments in inventory into cash received from customers. Essentially, a shorter CCC means smoother cash flow.

Impact on profitability and liquidity

  • Profitability improves as funds tied up in working capital can be reinvested into high-ROI opportunities.
  • Liquidity reduces the risk of insolvency, ensuring the company can cover its short-term liabilities.

How it works

  1. Monitor assets and liabilities: track cash, accounts receivable, inventory, and accounts payable. 
  2. Analyze ratios: use ratio analysis to measure working capital management effectiveness.
  3.  Make decisions: use the information to make decisions about short-term spending and debt. 
  4. Improve processes: use software to automate processes like invoicing and payments. 

Types of working capital

To create financial strategies tailored to your business, it’s critical to understand the different forms of working capital:

  1. Permanent working capital 

Permanent working capital is funds that are consistently required to support basic operational needs (e.g., maintaining inventory). These funds remain constant irrespective of fluctuations in business activity levels and are vital for sustaining long-term operations. Properly managing permanent working capital ensures the business operates smoothly even during periods of economic uncertainty.

  1. Regular working capital 

These are funds needed to cover routine operational expenses in running a business. Regular working capital is critical to maintaining liquidity and meeting short-term obligations without disruption.

  1. Reserve working capital 

Reserve working capital is funds set aside to address unexpected expenses or financial contingencies due to unforeseen circumstances. Maintaining adequate reserve working capital safeguards the business against potential disruptions and assures operational stability under challenging conditions.

  1. Fluctuating working capital 

Fluctuating working capital requires careful planning and monitoring to effectively allocate resources during peak and off-peak periods. Proactively managing these variations helps prevent cash flow issues and supports business operations.

  1. Gross working capital 

Gross working capital refers to the total current assets available within a business, including cash, accounts receivable, inventory, and other liquid assets. By effectively managing gross working capital, the organization has sufficient resources to meet short-term obligations while enabling smooth operational processes.

  1. Net working capital 

Net working capital is the difference between a company's current assets and current liabilities, which indicates financial health. Maintaining positive net working capital is essential for meeting short-term liabilities and supporting day-to-day operations.

5 Key components of working capital

To streamline working capital management, businesses usually focus on the following  critical elements:

  1. Current assets

Current assets encompass resources a company can convert into cash within a short period, typically a year. These assets include i) cash and cash equivalents ii) accounts receivable, inventory, and iii) short-term investments. Managing current assets is crucial for maintaining liquidity while covering immediate financial needs. These resources allow businesses to manage operations seamlessly, respond to market demands, and support growth opportunities. Proper oversight and optimization of current assets directly contribute to a strong financial position. 

  1. Current liabilities

Current liabilities include i) accounts payable and ii) short-term loans, which represent the company's immediate financial responsibilities. Accounts payable refers to amounts owed to suppliers or vendors for goods and services already received, while short-term loans typically involve borrowed funds that must be repaid within a year. Correctly managing these liabilities is essential to maintaining the organization's financial health and smooth daily operations.

  1. Net working capital formula

Net Working Capital = Current Assets - Current Liabilities

Net working capital is a critical measure of a company's short-term financial health, operational efficiency, and liquidity. A positive net working capital means that the company has enough current assets to cover its current liabilities, meet financial obligations, and invest in growth opportunities. On the other hand, a negative figure could mean potential liquidity issues and necessitate immediate attention to protect the business’s stability.

What should be excluded from working capital?

Items that aren’t part of a company’s short-term assets or liabilities are not part of working capital and include: fixed assets (e.g. real estate and equipment that can’t be converted into cash within a year, long-term debt and lease obligations that go beyond a year, retained earnings or common stock, and patents and trademarks).


Benefits of effective working capital management

Why should organizations prioritize working capital management? Read on for the key benefits: 

Improved cash flow & liquidity 

Effective working capital management ensures a steady and reliable cash flow, allowing organizations to maintain liquidity for operational needs and unforeseen expenses. By optimizing receivables, payables, and inventory levels, companies can reduce financial strain and avoid costly short-term borrowing. This proactive approach not only supports day-to-day operations but also provides flexibility to take advantage of strategic investment opportunities that power long-term growth and stability.

Better risk management 

Effective risk management is critical for mitigating financial uncertainties and safeguarding organizational stability. By analyzing potential threats and implementing robust contingency plans, companies can minimize the impact of adverse events on their operations. Proactive identification and evaluation of risks allow businesses to allocate resources strategically, reducing exposure to volatility.

This structured approach enhances decision-making processes and promotes resilience, ensuring sustained performance even in challenging market conditions.

Enhanced operational efficiency 

Streamlining processes, optimizing resource utilization, and reducing redundancies across the organization enhance your operations, improve productivity, and create better outcomes.Through working capital management, your business can create clear workflows and continuously monitor performance to align operations with strategic goals. This not only drives cost-effectiveness but also allows the company to quickly adapt to market demands for long-term success.

Stronger supplier & customer relationships 

Maintaining liquidity to meet its short-term obligations via working capital management means you’re making timely payments and fostering trust with suppliers. This reliability strengthens partnerships, leading to better negotiation terms and consistent supply chains. Similarly, optimized working capital enables businesses to offer favorable payment terms to customers, enhancing satisfaction and loyalty.

By balancing cash flow, businesses can create mutually beneficial relationships that support long-term growth and collaboration.

Challenges in managing working capital

While the benefits are clear, managing working capital is not without challenges:

  1. Cash flow constraints 

Insufficient liquidity can lead to missed growth opportunities or delayed payments. Businesses often struggle to balance incoming and outgoing cash, particularly when dealing with fluctuating sales cycles or unexpected expenses. Additionally, relying on credit or slow-paying customers can exacerbate these constraints, straining operational efficiency.

  1. Over-reliance on credit 

Excessive dependence on short-term financing can lead to high-interest costs. This can reduce financial flexibility and leave your businesses vulnerable during low revenue periods. Furthermore, it can create a cycle of dependency that hinders long-term growth and hampers the ability to invest in strategic initiatives.

  1. Inventory management issues 

Poor inventory management disrupts cash flow, as excess inventory leads to increased holding costs, while insufficient stock can damage customer relationships and diminish brand reputation. Balancing inventory levels is critical to ensure liquidity and maintain operational stability. 

  1. Accounts receivable delays 

Late payments from customers hinder cash flow and operational agility. These delays reduce the funds needed for day-to-day operations and strategic investments. Prolonged payment cycles may also increase reliance on external financing, raising borrowing costs and financial risk.

Strategies for working capital management

To overcome these challenges, CFOs and treasurers can adopt some of the following strategies:

  1. Cash flow forecasting & budgeting 

Anticipate future cash needs to avoid shortfalls or surpluses. Tools like cash flow software can streamline projections. Regularly updating cash flow forecasts to align with changing market conditions and organizational priorities, for better decision-making. 

  1. Inventory control techniques 

Implement just-in-time (JIT) or ABC analysis to maintain optimal inventory levels. These methods minimize holding costs and reduce the risk of obsolescence while ensuring that stock levels meet demand. Regular inventory audits and leveraging software solutions can further enhance efficiency and accuracy in inventory management.

  1. Streamlining accounts receivable & payable 

Encouraging faster customer payments by offering early payment discounts, which improve cash flow and reduce outstanding receivables. Additionally, negotiating extended payment terms with suppliers gives you more financial flexibility and improved management of accounts payable.

  1. Leverage financial tools & technology 

Use automated solutions like supply chain finance platforms and electronic invoicing to improve efficiency. These tools streamline payment processes, reduce errors, and provide real-time insights into cash flow, fostering more informed decision-making.

Differences between related concepts

Lastly, it’s crucial to disentangle working capital management from related concepts:

Working capital vs. cash management 

Working capital compares current assets to current liabilities to understand whether the finance team can pay bills and other short-term liabilities. Cash flow measures the cash inflows and cash outflows, as shown in the cash flow statement. 

Working capital vs. capital budgeting 

Capital budgeting focuses on long-term strategic investments, while working capital management is concerned with the short-term, operational aspects of managing a company's current assets and liabilities.

Take control of your working capital today

Working capital management isn’t just a financial principle—it’s the backbone of operational efficiency and business growth. For CFOs, VPs of Finance, Controllers, and Treasurers, understanding and implementing these strategies is vital for maintaining liquidity, optimizing cash flow, and securing a competitive edge.

Find gaps in your working capital strategy? Prioritize stronger relationships with suppliers, streamline receivables, and harness the power of automation to elevate your game. A balanced working capital approach today can fuel unprecedented growth tomorrow.

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Cash Management
Cash flow management survey 2025: The results are in

To get more insight into the state of AI and automation in cash flow management in 2025, we commissioned a survey of 200 senior finance professionals. Its purpose is to shed light on their current methods, challenges and priorities.

This report was administered online by Global Surveyz Research, an independent global research firm. The survey is based on responses from CFOs, VPs Finance, Directors/Heads of Finance, Controllers, and Treasurers across a mix of industries including tech, E-commerce, real estate, asset- based companies, hospitality, and manufacturing.

Survey participants hailed from companies with an ARR of $50M+ and treasury departments that include 4+ people (25%), 1-3 people (25%), or no treasurers (50%), in the US, UK, DE/FR, and MEA.

What the survey found: Increasing pressure on finance teams to improve efficiency, but continued caution about adopting AI solutions 

The survey revealed that 33% of respondents faced internal operational risks, such as fraud or system breakdowns, over the past year. Additionally, 32% highlighted regulatory constraints, while 27% cited debt obligations with near-term maturities as significant challenges. This convergence of internal and external pressures is compelling organizations to rethink their approach to cash flow management.

To stay resilient, finance teams are focusing on achieving real-time visibility and implementing proactive measures to mitigate risks before they escalate.

According to the survey, areas such as audit and compliance, expense management, transaction categorization, and cash flow forecasting were rated equally as high priorities for AI implementation. These technologies are streamlining traditionally labor-intensive processes, enhancing accuracy, and freeing up valuable resources.

Larger enterprises, in particular, find AI indispensable, as its ability to process vast transaction volumes reduces the burden on finance teams and allows them to focus on strategic decision-making.

The adoption of AI is not without its challenges. Concerns around cost, regulatory compliance, and data reliability remain top of mind for many finance teams. However, the benefits of automation—from error reduction to improved forecasting capabilities—are undeniable. By investing in scalable, AI-driven solutions and prioritizing data quality, companies can future-proof their operations and ensure they are prepared to navigate an increasingly complex financial landscape.

As the 2025 survey highlights, embracing innovation is no longer optional for finance teams. By leveraging AI to overcome liquidity challenges and optimize operations, organizations can transform their cash flow management processes and secure a competitive edge in an era of rapid change. 

Download the full survey report here

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Cash Management
What controllers need to know about treasury management in pre-treasury teams

At growing companies, or companies with lean finance teams without a dedicated treasury function, controllers often find themselves wearing multiple hats. Without a dedicated treasury team, the responsibility of treasury management often falls on their shoulders. This expanded role requires controllers to not only excel in traditional financial functions but also to master the complexities of managing liquidity, mitigating risks, and ensuring financial stability.

Here’s what controllers in lean pre-treasury teams need to know about taking ownership of treasury management:

Juggling complex treasury operations, with lean resources

Without a dedicated treasury team, controllers must take charge of several critical treasury functions:

  • Cash Management: Ensuring the organization has sufficient liquidity to meet short-term obligations while avoiding excessive idle cash. This involves cash flow forecasting, tracking accounts receivable and payable, and optimizing cash reserves.
  • Risk Management: Identifying and addressing financial risks, including currency fluctuations, interest rate changes, and credit risks. Controllers may need to implement basic hedging strategies and stay vigilant about market trends.
  • Debt Management: Managing loans, credit lines, and other forms of debt effectively, balancing costs and flexibility while ensuring compliance with loan covenants.
  • Investment Management: Making decisions about surplus funds to maximize returns while maintaining liquidity and mitigating risks.

Understanding and taking ownership of these functions empowers controllers to ensure the organization’s financial health in the absence of a treasury team.

Prioritizing cash flow visibility

For controllers handling treasury responsibilities, cash flow visibility is paramount. Accurate, real-time insights into cash positions enable controllers to:

  • Identify and address liquidity gaps.
  • Plan for short-term financing needs.
  • Optimize working capital.

Leveraging tools like cash management systems and enterprise resource planning (ERP) software can provide controllers with a consolidated view of cash across accounts, currencies, and business units. This visibility is crucial for effective decision-making.

Utilizing technology as a resource to work more efficiently

Controllers in lean teams must rely on technology to handle treasury tasks efficiently. Key tools and innovations include:

  • Treasury Management Systems (TMS): Automating processes like cash forecasting, payment approvals, and risk assessments to reduce manual work and enhance accuracy.
  • Robotic Process Automation (RPA): Streamlining repetitive tasks such as bank reconciliations and cash position reporting.
  • Artificial Intelligence (AI) and Machine Learning (ML): Using AI and ML for predictive cash flow analysis, fraud detection, and scenario modeling.

These technologies not only save time but also help controllers manage treasury responsibilities effectively, even in lean setups.

Mitigating financial risks without dedicated resources

Managing risks becomes more challenging without a dedicated team, but controllers can still establish effective practices:

  • Develop straightforward policies for managing foreign exchange and interest rate risks.
  • Stay informed about regulatory requirements to ensure compliance.
  • Utilize basic hedging techniques or financial products to mitigate risks where appropriate.

Controllers should also focus on regular reporting and analysis to monitor risk exposure and adjust strategies as needed.

Collaborating across functions

In lean organizations, collaboration is essential. Controllers must:

  • Work closely with finance and operations teams to gather relevant data.
  • Align treasury responsibilities with broader financial goals.
  • Communicate regularly with executive leadership to ensure transparency and alignment.

Collaboration helps bridge resource gaps and ensures that treasury management is integrated into the overall financial strategy.

Ensuring regulatory compliance and strong governance

Even in lean teams, compliance cannot be overlooked. Controllers must:

  • Stay updated on tax regulations, financial reporting standards, and anti-money laundering (AML) requirements.
  • Implement strong internal controls to prevent fraud and errors.
  • Use technology to streamline compliance tasks and ensure accuracy.

By focusing on governance and compliance, controllers can safeguard the organization’s financial integrity.

Balancing strategic and operational roles

Controllers managing treasury functions must balance day-to-day operations with strategic planning. This includes:

  • Evaluating short-term and long-term financing options.
  • Planning for growth initiatives, such as capital investments or expansions.
  • Assessing the financial implications of key business decisions.

By adopting a strategic mindset, controllers can contribute to the organization’s financial success while managing immediate treasury needs.

Adapting to dynamic financial environments

Economic and market changes can pose significant challenges for treasury management. Controllers in lean teams must:

  • Monitor macroeconomic trends and their potential impacts.
  • Adjust strategies in response to changing interest rates, inflation, or currency fluctuations.
  • Build contingency plans to address unexpected disruptions.

Adaptability and proactive planning are crucial for navigating an ever-changing financial landscape.

Supporting controllers in pre-treasury teams to manage complex treasury operations

Panax is designed for lean teams with complex treasury needs, so it is a perfect tool for controllers who need to manage treasury. Panax utilizes automation and AI to reduce manual work and increase strategic insights, so controllers can have full visibility over all of their cash. Panax makes cash forecasting and budgeting easy, even without a dedicated team. Panax generates reports so that controllers can get a bird’s eye view of their cash situation, but also deep dive into specific entities or currencies, so they can avoid cash risks and optimize liquidity. Get a Panax demo here

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