Optimization of the company's cash flow

4 - LIMITS THE PREDICTIVE VALUE OF THE METHOD OF RATIOS.
Some authors have questioned whether ratios could not be used as predictive tools. Two research was primarily
conducted.
Firstly, on the difficulties of cash forecasting;
And secondly, on the prediction of bankruptcy of enterprises.
4.1 - RESEARCH ON THE FORECAST OF CASH DIFFICULTIES.
The sample of selected companies was divided into two groups: on the one hand, companies having cash flow for a
certain period ("bad companies"), and, on the other hand, companies did not have difficulty during this same period
("good companies"). From the financial statements of companies established prior to the period under review, the
authors have attempted to discern what the ratios were different from a group of companies to another. The results
were not conclusive. For a large number of companies studied the considered ratios did not foresee any difficulties
of cash.
4.2 - RESEARCH ON THE PREDICTION OF BANKRUPTCY OF ENTERPRISES.
The study involved a sample of 83 industrial enterprises that had gone bankrupt during the period 1946-1965, and
33 companies who had experienced financial difficulty. Twenty-two ratios were calculated from financial statements
of 5 years preceding the bankruptcy of "bad companies". However, the predictive ability of this combination of ratios
declined very quickly as soon as it was to predict the bankruptcy in more than a year. In other words, this analysis
noted bankruptcy more that she did. Other studies have been carried out (3), but it does not seem that the use of
ratios as a tool for forecasting gave great satisfaction.
Handle cash using the ratios method does not seem to lead to clear conclusions. In these circumstances, decisionmaking
is difficult. Ultimately, all the criticism that can be made against it come back to say that the method places
the company in liquidation situations. It disregards the dynamic aspect of the operation and in particular the cash
management.
SECTION 2: THE CONDITIONS OF FINANCIAL EQUILIBRIUM.
Analysis of financial transactions that led to the fund balance allows to enjoy the cash position at a time given to
anticipate the flow of funds to come, and, therefore, to have sufficient information to initiate any corrective actions.
To define the conditions of the financial balance, the managers of the company will have to attempt a detailed
reconstruction of the movements of flow of cash receipts and disbursements through the firm or likely to occur
during the reporting period. From this reconstruction or the anticipation of changes in cash, they will be able to
exercise permanent surveillance of the periodic adjustment entries and cash induced by the operation of the business
However a full record of the movement of cash is difficult to achieve because of the multiplicity of payment and
recovery operations. In addition, such work would be awkward because of the profusion of raw and indiscriminate
information that it would bring in. Also, traditionally, it’s preferred to use an indirect analysis of changes in cash
through the global flows affecting the elements of the turnover of the firm. Indeed, any recipe or any expenditure
affects the volume or the composition of the assets or the liabilities. The variation of elements of assets and liabilities
between the beginning and the end of a period is a consequence of the movements of flow of funds during this
period. An analysis of these movements of funds will show where the contractor decided to commit capital, reduce
its investments, to obtain additional capital, reduce its debts...The turnover of the company will be the trace of these
movements of funds that pass through the Fund. In other words, the study of heritage mutations to trace cash, and
variations in these terms to understand the current situation of cash or to anticipate its future location. The analysis
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