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Cash Flow Statement: One of Your Most Trusted Tools!

And why you need better control over the preparation of this statement…

I just read article “SEC Nudges Companies on Cash Flows”, written by Compliance Week author, Tammy Whitehouse.  It refers to a study done by the SEC of cash flow restatements, as conveyed by T. Kirk Crews, Professional Accounting Fellow, Office of the Chief Accountant, U.S. Securities and Exchange Commission.  Findings suggest that the majority of errors were due to poor internal control over financial reporting, as well as too much reliance on end-user computing tools, such as spreadsheets. The article continues to explore the various possibilities leading to these errors, and stresses the importance of having the right processes in place with the appropriate internal control framework and full understanding of FASB ASC 230 – Statement of Cash Flows.

The statement of cash flow expresses a company’s results in terms of debits and credits to operating, investing and financial activities by the company, without adjusting for accrued revenues and expenses. It does not show whether or not a company is profitable.  However, it does in fact show the cash position of the company at a specific date by measuring revenue against outlays.  While a cash flow statement is required by the SEC in FORM-10K and FORM-10Q filings, as well as a common practice in all audited and reviewed financial statements prepared by external auditors for privately held companies, a forecasted Statement of Cash Flows is rarely seen in the budgeting and forecasting process.

Why is the Statement of Cash Flows so important?

The Statement of Cash Flows shows the sources of all cash receipts and cash outlays segregated into the following categories:

1)    Cash Flows from Operations
2)    Cash Flows from Investing Activities
3)    Cash Flows from Financing Activities

Whether the direct method or the indirect method are used, all cash receipts from customers, loan proceeds, sale of company stock, sale of assets and other sources are clearly listed on the statement, each appearing in one of the three categories listed above.  All cash outlays such as payments to suppliers, employees, taxing authorities, interest payments, payments for investments in other entities, and payments for acquisition of assets also appear in these three categories.

In the case of a forecasted Statement of Cash Flows used for planning and budgeting, the benefits of having an accurate and complete statement are projecting and understanding:

1)    How much cash will be received in each planning period from the three identified cash flows categories.
2)    How much cash will leave the organization via payments to suppliers, employees, taxing authorities and other entities, segregated by the three cash flows categories.
3)    Cash requirements during the planning period and arranging for financing, sale of assets and other activities in order to meet the anticipated cash needs and well ahead of time.

My observation and experience is that many ERP and accounting software solutions do not produce an accurate Statement of Cash Flows, leaving users to either program it themselves in their ERP system or resort to using spreadsheets.  Spreadsheets are neither an effective nor efficient tool to produce financial statements.

The solution is to have more ERP and accounting software vendors provide a pre-programmed template for this statement where users can link their GL account or account groups to various components of the Statement of Cash Flows.

As far as planning and budgeting solutions are concerned, I’d like to see an integrated Statement of Cash Flows, with an integrated balance Sheet and Income Statement.  These statements should be automatically generated from the aggregation of all user forecasted data and with the use of the beginning Balance Sheet account balances, and will produce a complete and accurate set of financial statements for every period in the budget.

Readers of this blog know that with a software application like Budget Maestro, forecasting an accurate and complete Statement of Cash Flows is reality.  An accurate and complete Statement of Cash Flows is at the top of my list, along with the Balance Sheet, both for actual accounting and for budgeting.  There is little wonder now why the SEC is urging companies to take a closer look at their internal control over financial reporting, particularly the preparation of the Statement of Cash Flows.