Home Cash Flow Active and passive cash flow: everything you need to know

Active and passive cash flow: everything you need to know

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Active and passive cash flow: everything you need to know

Active cash flow and passive cash flow are two concepts that must be understood to manage a company’s finances effectively.

How to calculate net cash flow?

To conduct rigorous cash management in a company, knowing the fundamental difference between active cash flow and passive cash flow is important. They each include different components that will need to be monitored very regularly to control the company’s financial trajectory. 

Understanding a company’s active cash flow

Cash assets represent all liquid financial assets and monetary resources easily convertible into cash held by a company. 

What are the components of active cash flow?

Active cash flow includes items needed to meet the immediate financial needs of the business, such as: 

  • Assets available in bank accounts
  • Cash balance
  • Accounts receivable
  • Stocks
  • Certain investments (those that maintain a certain level of liquidity)

What is active treasury used for? 

The level of active cash is a crucial indicator for ensuring a company’s stability and solvency. It allows for meeting current expenses, payments to suppliers, and employee salaries and provides a safety margin for unforeseen events. Effective management of active cash helps avoid liquidity problems, late payments, and excessive borrowing costs. By understanding the components of active cash and using the right calculation methods, financial managers can better anticipate the company’s liquidity needs and make strategic financial management decisions.

Cash flow is also a key indicator of a company’s financial health. An adequate level of cash flow allows the company to invest in new opportunities, finance growth, and weather potential economic downturns. By regularly monitoring cash flow, CFOs and accounting managers can assess the company’s financial performance, identify financing needs, and take corrective action if necessary. Proactive management of cash flow helps strengthen the company’s financial stability and long-term viability.

Understanding Passive Cash Flow

Cash flow refers to all of the company’s short-term debts (long-term debts, on the other hand, do not fall into this category). 

What is passive cash flow composed of?

The following components are generally found in a company’s passive cash flow: 

  • Short-term loan maturities (less than one year)
  • Authorized overdrafts
  • Cash facilities

Why should you monitor your passive cash flow?

Monitoring the level of passive cash is of paramount importance for any business. Indeed, short-term debts can significantly impact a company’s financial stability and ability to meet its obligations. Poor management of passive cash can lead to payment difficulties, penalties, or even solvency problems, jeopardizing the company’s sustainability. 

How to control your passive cash flow?

Implement rigorous financial management practices! First, it is recommended that you develop a cash flow plan that forecasts short-term cash inflows and outflows. This will help you better anticipate financing needs and take appropriate measures to avoid bank overdrafts or late payments.

Next, it is crucial to maintain regular communication with creditors and financial institutions to negotiate favorable payment terms, such as payment schedules that fit the company’s capacity. It is also important to closely monitor the terms of loan agreements to meet deadlines and avoid penalties or high interest rates.

It is also highly recommended that regular financial forecasts be established and updated according to changes in the company and its economic environment. This will allow the company to anticipate cash flow needs, identify potential imbalances, and take corrective measures in time.

How to calculate net cash flow?

A company’s net cash flow is simply the difference between its active and passive cash flows. It can also be calculated by subtracting the working capital requirement (WCR) from the overall net working capital. 

A positive net cash flow means that the company can finance its operating cycle and growth. On the other hand, a zero or negative net cash flow should be seen as a warning signal. The company then has no more financial room for maneuver.

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