Tuesday, April 25, 2017


During the last years, the company's financial management has been worsened by the economic situation and it is difficult to predict the input and output currents. For this reason, it is necessary to use an advanced financial system in order to check every day the performances of the firm.

The suggested method, is designed to quickly detect imbalances and liquidity opportunitythroughoutthe analysis of the cash flow. Nevertheless, it is quite complicated, especially for the small and medium firms, to make a thorough forecast of profits and loss since it is hard to elaborate periodic budget on short-term.

The key to obtain a better financial knowledge is to keep control on the financial dynamic of the company more frequently to avoid to overcoming the credit granted by the banks.

      In some cases, the decrease of liquidity can be caused by high rate of investments that might be able to generate profits in the future.

A Valuable method to prevent liquidity shortages is Cash Out Cash In (COCI)whose purpose is to control the evolution of the current liquidity by means of simplicity and quickness.

In  order to make a good use of this method, you should carry out the following three steps:First of all you have to identify the relevant transactions that generate or use cash. These kind of transactions are those who are accountable for the most variations of EBIT. Some examples are;

-          Purchase of stock

-          Debts vs. suppliers

-          Credits vs. customers

-          Wage of the labour force

-                             -         The payment of instalment of a mortgage

As a second step we have to structure the scheme of cash flows. In particular, we have to determine and to consider just the accounting transactions that generate or absorb monetary resources. If we use specific accounts for each costumer and each supplier, the analysis of the cash flows will be able to show the periodic trend of liquidity linked to each one of them, as well as the overall run.

Once we have pinpointed the relevant transactions for the analysis of cash flows, it is enough to set them up in COCI system so that every time it will take place a relevant transaction in COGE (General accountability), it will be registered automatically in COCI as well. Moreover, it is strongly advisable to keep the management of liquidity well separated by the evaluation of investment.  In fact, on one hand the liquidity implies to handle a huge amount of daily transactions, on the other hand evaluating an investment means to take account for many other variables beyond liquidity.

Finally, we reckon it is important to underline that the liquidity accounting can’t be as accurate as the general one. We do not have to consider it like a weakness point of COCI, since the purposes of the two kind of accountancy are different. COGE has to be used to develop the final balance of the firm, whereas COCI has to show the general and daily trend of our liquidity.