Corporate performance management often revolves around revenues, gross margin and operating result (or EBITDA, for that matter). Corporations that have a wider view on performance management sometimes introduce working capital indicators such as DSO to their performance dashboard. Only very few have advanced to such a level that they actively measure and manage cash flows by budget owner.
Amongst the reasons not to leverage off of cash flow statements for performance management purposes there is the perceived complexity that comes with both the direct and indirect methods. The direct method of cash flow reporting is considered too complex to generate automatically from the transactional systems, while the indirect method of cash flow reporting more often than not is a complicated, mathematical calculation that provides readers too little informative value to work off of.
Designing a corporate data model based on how individual transactions are captured in accounting ledgers provides for a transparent and reliable indirect cash flow presentation.
A pity. Designing a corporate data model based on how individual transactions are captured in accounting ledgers provides for a transparent and reliable indirect cash flow presentation. Our clients identified 3 main reasons why the indirect cash flow statements we designed are of value to them.
Giving more attention to cash flow statements in corporate reporting helps to retain a healthy balance between accounting profits and physical cash flows. Cash conversion is the buzzword here: if set up properly, group controllers can quickly identify over-enthusiastic accrual accounting at group companies as the cash flows will lag behind the accounting profits.
The indirect cash flow statement is a great instrument to validate the correctness and consistency of the reported trial balance. Since the indirect method relies on the correlation between income statement and balance sheet, group controllers more easily identify inconsistent reports by looking at cash flow statements.
Where the cash flow statement according the indirect method is the calculated output of the income statement and balance sheet in actual reporting, it is actually an input variable in budget and forecast reporting in order to arrive to sensible balance sheet projections. Group controllers now have an instrument to estimate and explain balance sheets within the planning process.
Using the cash flow statement to your benefit requires staff to think in terms of journal entries, as this is also the principle behind how we design the corporate data model: working off of the logical relationship between income statement, balance sheet and cash flow statement for every transaction captured in the accounting ledgers. It is quite the exercise to build up a corporate data model like this, but the results speak for themselves. As a CFO at one of our clients commented: “The consolidated cash flow statement is now done within minutes, saving two days of manual work”. This is thanks to the cash flow statement being an integrated part of the corporate data model, rather than being defined and calculated ad hoc.
Introducing cash flow indicators within a performance dashboard is a logical next step once corporate reporting is leveraged off of an integrated corporate data model.
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Casper van Leeuwen is a partner at Satriun Group, a European consultancy specialized in Corporate Performance Management and the practical application of CPM with enterprises.
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