A key concept in the financial management of a company, cash flow provides an overview of all the amounts of money directly available to your company. In particular, it allows you to establish the best strategy for developing an activity. What is active cash flow? What is the difference with passive cash flow? How can you increase your available cash quickly? Agicap tells you everything you need to know about active cash flow.
What is active treasury?
Active cash flow corresponds to all the liquidity available to a company. Its main utility is based on the speed of mobilization of liquidity to finance the needs of a company. These assets are recorded at the bottom of the balance sheet and include:
- Cash balances;
- Accounts receivable;
- Bank assets;
- Cash assets that can be mobilized at any time;
- Stocks;
- Investment securities, only if it is possible to transform them into cash without delay.
Active cash is sometimes referred to as a company’s “cash assets” or “ current assets .”
Active cash flow and passive cash flow: what are the differences?
Within a company, we distinguish between active cash and passive cash. The latter refers to bank overdrafts, i.e. short-term professional debts, discounted bills not yet due and bank credit balances. They mainly include operating debts and are equal to bank credit balances and bank overdrafts.
Subtracting passive cash from active cash gives net cash. The formula is:
Net cash = (cash assets) – (cash liabilities).
Therefore, depending on whether the net cash balance is positive or negative, a manager can know whether he can pay his operating expenses and finance his development.
The importance of positive active cash flow
It cannot be said enough: it is essential to regularly monitor all of your cash flow and in particular your current assets. In this way, you will keep a sky on your bank statements to avoid any unnecessary overdrafts. Since the minimum threshold required for active cash flow varies from one company to another, it is however necessary to analyze the balance sheet taking into account the activity.
Thus, in the case of positive cash flow, current assets are in principle in surplus. This key indicator makes it possible to prove the good financial health of the company to banks, suppliers or investors. The ideal amount of available cash should make it possible to:
- pay debts on time;
- negotiate advantageous financing conditions with banks;
- attract investors ;
- self-finance the growth of the company;
- prevent unanticipated expenses.
Be careful not to overestimate positive active cash flow
While a positive active cash flow is a good sign, be careful not to oversupply it. Indeed, anticipating fluctuations in future financial flows (large bills to pay, settling social security contributions or salaries at the end of each month, etc.) allows you to know the rhythm of cash inflows and outflows to always remain supplied with cash.
However, note that an exceptional accounting transaction temporarily inflates the cash level, like the sale of a fixed asset. This can potentially mask an overdraft or chronic financial difficulties. This is also why holding too much surplus capital in the bank can be a sign of poor financial management by the company.
How to increase your active cash flow?
There are several methods to increase active cash flow. Indeed, excess active cash flow is based on the rapid collection of trade receivables and the negotiation of payment terms with suppliers. The challenge is therefore to find the right balance between receipts and disbursements.
You also have the option of using down payments from your customers; this will smooth out incoming cash over time. You can also negotiate agreements with your suppliers to extend the payment period for your debts (60 days maximum after the invoice is issued). Finally, contact your bank, which has many tools to help improve your active cash flow (cash credit, daily transfer, increase in the authorized overdraft limit, etc.).
To help you clean up your accounts, digitize your cash flow monitoring with our Agicap financial management tool. Automate customer reminders, schedule cash inflows, and outflows, and anticipate the impact of a loan based on its maturity, all in a single software.
To control your cash flow needs and avoid any major obstacles to the development of your business, there is an effective solution: equip yourself with cash flow management software.