Is your WCR under pressure? Do your cash flow forecasts diverge from reality? A cash flow audit is essential! Control your cash flow, anticipate risks and optimise your average payment period thanks to a rigorous analysis. Discover the key steps to securing your cash flow and ensuring the long-term future of your business.
Cash flow is the lifeblood of any business. Accounting profitability is not enough: without available cash, survival is threatened.
When the working capital requirement (WCR) is rising or cash flow forecasts diverge significantly from reality, a cash flow audit is called for..
Auditing your cash position involves systematically analysing financial flows and processes in order to identify weaknesses, correct deviations and ensure that every euro is optimised to secure liquidity.
Our aim? To help you anticipate stress, manage your cash flow and strengthen your company's financial position.
Who audits cash flow and when?
Internal audit is generally carried out by the finance department (CFO, treasurer, management controller). These regular controls ensure that financial flows are monitored effectively. In large companies, internal audits are carried out periodically, every six months or every year.
The external audit is carried out by the statutory auditors (CAC). In France, it is compulsory for companies exceeding two of the following three thresholds: €8m in sales, €4m in total assets or 50 employees. Specialist firms may also be called in from time to time at the request of company directors.
To optimise your financial security, carry out a minimum quarterly internal audit. Prepare for mandatory external audits by carefully consolidating financial data.
Audit frequency and obligations according to company size
| Type of company | Internal audit | External audit (CAC) | Usual frequency |
|---|---|---|---|
| VERY SMALL BUSINESSES (<€8M TURNOVER) | Occasional | Rare, voluntary | Annual or exceptional |
| SMEs (€8m to €50m turnover) | Regular | Mandatory annual if thresholds exceeded | Annual to quarterly |
| ETI (>€50M SALES) | Continuous | Mandatory annual | Annual and interim |
| Large companies | Continuous | Mandatory annual & additional audits | Permanent |
The 5-step cash flow audit
Step 1: Diagnose your cash position
An audit begins with a precise diagnosis of your current and past cash position. The aim is to collect and check all the available data to get a clear picture of your liquidity position.
This initial analysis enables us to detect any accounting discrepancies or anomalies that could distort management.
Initial control points :
- Check the correspondence between the accounts and the bank statements for all accounts (bank reconciliations, cash investments).
- Control specific operations (factoring, discounted bills, cash-pool, etc.) and confirm cash balances at the end of the period (banks, cash registers).
These checks validate that the cash displayed corresponds to reality.
Step 2: Analyse WCR
Working capital requirement (WCR) represents the financial resources needed to bridge the gap between cash outflows (purchases, expenditure) and inflows (sales, receipts). It is calculated using the formula :
WCR = inventories + trade receivables - trade payables.
A high WCR means that a lot of cash is tied up in operations (in receivables or inventory) rather than available in cash. It is therefore crucial to analyse the components of WCR in detail in order to identify the levers for optimisation:
- Trade receivables (DSO/DMP)
Evaluate your customers' DSO (Days Sales Outstanding). A DSO that is too high is a sign that collection is taking too long, which is suffocating cash flow by tying up liquidity in outstanding invoices.
For example, allowing your customers to pay 60 or 90 days in arrears makes you a non-remunerated banker. This mismatch between your outflows (expenses, suppliers) and your delayed inflows can choke your cash flow.
Another example: a DSO that rises from 45 to 60 days, on average monthly sales of €300,000, ties up around €150,000 more in receivables (15 days' sales). That's €150,000 less cash available to meet current expenses.
The aim is therefore to reduce this DSO through collection actions and appropriate payment terms. These include proactive reminders, early payment discounts, invoicing without delay after delivery, etc.
- Trade payables
Analyse your suppliers' average payment times (Days Payable Outstanding). Unlike DSO, a higher DPO indicates that the company is paying its suppliers less quickly, which eases the pressure on cash flow.
Increasing your payment terms reasonably (without exceeding negotiated or legal conditions) can be a lever for maintaining liquidity. However, be careful not to damage supplier relations: give advance warning and respect the promised payment dates.
- Stocks
Keep an eye on stock management. Over-stocking ties up cash unnecessarily. Monitor the stock turnover rate: the higher it is, the more cash you have available. Reduce surplus stocks by adjusting your supplies to demand (just-in-time deliveries) and selling off unsold goods to generate cash.
In a nutshell, any optimisation of WCR translates directly into a gain in cash flow. Every euro released from trade receivables or inventories, or obtained by deferring a supplier payment, is a euro of extra liquidity in your bank account.
Conversely, an increase in WCR (for example, an increase in receivables or inventories) will have a negative impact on the cash balance if it is not financed.
Step 3: Check forecasts and future cash flow
Discrepancies between forecasts and actual cash flow are often the trigger for an audit. So you need to take a close look at your forecasting tools and their reliability.
Start by comparing forecast cash flows with actual cash flows over the last few months: what differences do you notice, and what are they due to? Identify the incorrect assumptions (overestimated sales, delayed receipts, unforeseen unbudgeted expenditure) that have led to these discrepancies. A rigorous audit will seek to understand whether the deviations are due to a lack of information, excessive optimism in forecasts, or monitoring that is too far apart in time.
Good forecasting practices : Have a robust cash flow forecast and update it frequently. Ideally, you should update your forecasts every week, or even every day in tense periods. Include all expected receipts and disbursements (sales, subsidies, payroll, social security charges, rent, tax, loan repayments, etc.) over a period of at least 6 to 12 months. The slightest omission will distort the final balance and give a misleading picture of your situation.
Modern tools : make sure you have the right forecasting tool. Solutions connected to your banks and accounts (Cegid Loop, Sage 100 gestion Commerciale, Sellsy, Agicap, etc.) allow you to view future flows in real time, with alerts in the event of anomalies. If your budget is limited, a simple, well-organised spreadsheet may also suffice. The most important thing is to have a clear basis for projecting your cash flow and comparing it with reality on a regular basis.
Step 4: Strengthen day-to-day cash management
A successful audit leads to concrete improvements in day-to-day cash management. It's not enough to correct problems once and for all: you need to put processes and indicators in place to maintain control over the long term. This stage consists of instituting more responsive and more secure management of your cash flow.
- Close monitoring and indicators : Adopt daily (or at least weekly) cash flow monitoring and set up a dashboard of key indicators (available balance, DSO, DPO, etc.) to detect warning signs quickly. This proactive monitoring avoids unpleasant surprises (unexpected overdrafts, rejected payments) and enables you to rectify the situation without delay.
- Dunning and payment process : Take advantage of this opportunity to review your internal procedures for incoming and outgoing payments. Automate customer reminders (reminders before the due date, then reminders as soon as payment is overdue). Set up an invoice dispute management process to quickly resolve any disputes that delay payment. As far as suppliers are concerned, centralise the calendar of your due dates so that you can plan cash outflows in advance.
In short, the aim of this stage is to incorporate the lessons learned from the audit into your day-to-day operations. You also need to make sure that basic control procedures (payment validation, regular reconciliations) are properly followed. You will be able to react more quickly to adjust your decisions (postponing an investment, making an exceptional reminder to a major customer, etc.) according to the cash position.
Step 5: Implement the improvement action plan
Once the diagnosis has been made and the corrective measures defined, it's time to take action. The audit will have highlighted a number of areas for improvement to secure cash flow: it's up to you to translate them into a concrete action plan, with a timetable and people in charge.
Prioritise measures that will have a rapid impact, e.g. recovering overdue receivables, suspending non-essential expenditure.
Example of action plan following a cash flow audit (illustrative)
| Measure | Expected impact on cash flow | Priority |
|---|---|---|
| Immediate reminders for customers in arrears (> 30 days) | Accelerated collections: -15 days DSO (≈ +€100 k) | High |
| Negotiate longer lead times with key suppliers | Cash retained: +10 days of OPD (≈ +50 k€) | Average |
| Reduce obsolete stock (sale/removal) | Cash released (target +€30k) | Average |
| Freeze on non-urgent spending (investment, recruitment) | Immediate savings this quarter | High |
Auditing your cash position on a regular basis pays dividends for your business. The benefits of a successful cash flow audit include greater anticipation of liquidity needs, more reliable financial management thanks to clear indicators and proactive monitoring, and greater negotiating power with banks and financial partners.
In short, a cash flow audit gives managers the visibility and control they need to manage their business with complete peace of mind, even in an uncertain environment. It's an investment in time that translates into a more resilient business, capable of withstanding hard times without ever jeopardising its solvency.
