Solving the warnings (1/6): the financing warning

There are 6 warnings at the CASFLOAPP’s dashboard which we have set to help out our users. They are meant to warn you that something might be wrong with your simulation and that you should investigate and understand what is causing the triggering. It does not mean (except for one warning – the financing one) that your assumptions are definitely wrong. As with any business simulation model, it all depends on the context.

The first warning is the “Financing warning”, which is the most important warning of the 6. That is because if it is triggered, your forecasting is incorrect. Well, that is if you are performing a full forecasting (one where your balance sheet and the way you thinking to forecast the project matters, an approach that is more common when starting a new company; it may not be as relevant for a new project within an already existing company), because if you are looking at a plain viability analysis of a project, the financing will not be relevant to you. But in most cases, the balance sheet and the financing are relevant and must be correct; hence you will want to keep this warning untriggered.

So what does the financing warning mean?

This warning is triggered whenever the simulation of the balance sheet has a negative cash. It means that the operational cash flows, investment expenditures and financing have a combined negative cash flow that in total value is above the amount of cash of the previous year.

How is cash calculated?

Operational cash flows

Operational cash flows register payments of the clients to the company (+), payments of the company to suppliers (-), payments of the company to its employees (-) and tax payments of the company to tax authorities (-). Be aware that payments from clients and to suppliers are usually not instantaneous to an invoice. That is particularly true in almost all B2B comercial relations. Therefore, if a company has many days of accounts receivables, it means that will take some time before it gets payed by its clients.

Investment cash flows

Investment cash flows are based on the purchase of assets and on the receivables from assets that the company may sell. In CASFLOAPP it is only possible to forecast the purchase of assets; selling off investment is more uncommon, particularly for entrepreneurship projects.

Financing balance

The financing balance (or financing cash flows) adds the incoming cash from equity, other equity instruments, shareholders loans and financial debt and deducts all cash that was used to redeem any of those items.

Solving a triggered financing

To correct the financing of your project, follow the following steps:

  1. Check if your revenues and costs are well estimated. If these are not adequate, correct them.
  2. Check if your investment is correctly estimated. If it is not, correct it (it may be that you are over-estimating your investment.
  3. Check in which years the financing is negative. If you hover the mouse over the warning it will show in which years it is missing cash.

  1. Increase the financing of your project in the years that have been identified in the dashboard. You can increase it through:
    1. Issued Capital.
    2. Other equity
    3. Shareholder’s loan
    4. Bank debt.

The next post will be about solving the Net Income warning. Stay tuned!