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Cash flow planning practice in Russia

Author: Maria Stepanova, Financial Controller - Accountor Russia

Why are profit and cash inflow not the same?

These two concepts are different as generating profit or loss from the activities of an organization is not the same as cash inflow or outflow. Profit or loss is the difference between a company’s revenues and expenses, and this figure is recorded in profit and loss statements. The amounts invoiced and specified in sales documents are revenues, while the cash in bank accounts is what has actually been received from customers.

Is there a connection between these two concepts?

Cash receipts from customers help generating revenues as cash is necessary to pay employees, purchase materials, taxes, and so on. Without cash, products cannot be manufactured and revenues cannot be generated. So, although companies need clear cash flow planning to generate revenues and profits, not all companies in Russia make the distinction between profit and cash flow. Failing to make this distinction can be fatal for companies as in the long term this could result in bankruptcy.

Does this mean that there is a tendency in Russia not to monitor cash flow?

Cash flow planning, whether cash inflow from customers or cash outflow for payment of services, is an integral part of successful operations in a company. Profit makes no sense without cash. Some companies are profitable on paper, and in fact they can end up bankrupt, because the cash amounts received from customers are considerably smaller than the cash amounts paid for services, goods and other expenses. Such situation may occur in any company in any country. In the current market conditions, it is more important than ever for companies to expertly plan their cash flow.

What does cash flow management entail?

In theory, cash flow can be positive and negative.

Positive cash flow occurs when the amounts of advances received from customers or the payment of receivables exceed the cash spent to pay for services, accounts payable and other expenses.

Negative cash flow occurs when the cash amounts spent to pay for services, accounts payable and other expenses exceed the amounts of advances received from customers or the payment of receivables. Such situation is not ideal, but a number of actions may be taken to rectify it.

What is effective cash management?

We can select several methods to start with. Companies may themselves compile a complete list of methods based on their own characteristics, structure, etc.

  • Work with receivables. If procedures allowing timely recording of cash inflow are in place, then whenever there is a deviation from the procedure, it is always possible to identify the counterparties in breach of contract terms. But, when companies operate as if on a roller coaster ride, such strict planning makes no sense, and companies need to quickly adapt to existing conditions. In such situation, the following method is more useful.
  • Preparing short-term budgets and planning. Information on planned cash inflow and orders for purchase of goods, payment of services is used for this purpose. Payment schedules are drawn up based on this information, and it is possible to adapt quickly when any changes occur. Contract terms, payment schedules, deferred payment terms or possible discount for timely payment are among the information sources used to prepare payment schedules.

These methods are effective, especially short-term planning and budgets although it requires great flexibility in executive decision-making, and in large companies, the coordination of actions can take a long time. This is also compounded by the fact that too many people are involved in the decision-making process.

Many people, including foreign partners, end up buying the stereotype that it is not possible in principle to apply short-term planning in large organization, and so managers look no further than profit and loss statements.

However, modern conditions offer another approach to planning company activities.

What software solutions can be used to prepare cash flow statement and planning?

The standard configuration of 1С, unfortunately, allows preparing neither the structure nor a complete cash flow plan. To achieve this, in most cases, the data received from 1С is taken from analysis, while planning and budgeting are done using other tools.

Our consultants will be happy to assist your company in outsourcing financial functions, liquidity monitoring and forecasting and accounts receivable management If you need assistance please don't hesitate to contact us.