Many business leaders emphasise that "Cash is King", highlighting the crucial role cash plays in a company's financial health and stability. This underscores the importance of understanding how your company generates cash to meet debt obligations and fund operating expenses. An accurate cash flow statement is essential for gaining these insights, empowering business decision-making.
Automated Cash Flow Statement in CCH Tagetik
A cash flow statement details how cash entered and left a business during a reporting period. It provides a reconciliation between the opening balance and the ending balance of your cash and cash equivalents, typically classifying cash activities into operating, investing, and financing activities.
Via CCH Tagetik, we can provide you with an automated cash flow statement based on your income statement and the movements on your balance sheet items, so-called “variations”.
Variations
Variations make the reconciliation between the opening balances and ending balances of all balance sheet items and consequently tell “the story behind your figures”. We distinguish two types of variations: cash variations and non-cash variations. Cash variations drive the cash flow statement, whereas non-cash variations have no impact on your cash flow statement.
We elaborate this with an example on the tangible assets account “Plant, machinery and equipment”:
Suppose your business has an opening balance on its “Plant, machinery and equipment” account of 8 MEUR and an ending balance of 4.5 MEUR, hence facing a decrease of 3.5 MEUR.
How can this 3.5 MEUR decrease be explained? Did your business sell some assets, or is this movement purely related to depreciation? Maybe some assets got impaired as well? By introducing variations, the picture becomes clear:
- Acquisition of assets for 2.5 MEUR
- Disposal of assets with NBV of 4.5 MEUR
- Depreciation of assets of 1 MEUR
- Impairment of assets of 500 KEUR
But it goes far beyond these most common activities: Suppose you capitalised some assets under construction? Or transferred some assets between Group companies? Or even purchased a new business, including some Plant, machinery and equipment? All these activities can be tackled via variations, providing you with a clear overview of what happened in your business during the reporting period:
The 6.5 MEUR decrease can be explained by the following (additional) activities:
- Business combination including 750 KEUR of assets
- Capitalisation of assets under construction of 250 KEUR
- Transfer of assets between Group companies of 4 MEUR
The variety of variations defined can be fully customised based on your business needs. Apart from the variations explained above, you could also include variations related to IFRS 16 lease accounting, equity activities (like capital changes and dividend pay-outs), but also Purchase Price Allocation activities can be considered, as well as business divestment activities and currency translation topics.
Cash Flow Statement
As stated before, the CCH Tagetik automated cash flow statement is based on your income statement and your cash variations, meaning your cash flow statement is automatically generated by directly extracting information from your income statement and cash variations.
A cash flow statement typically starts from your net result of the period, followed by some adjustments for non-cash items. These adjustments are directly retrieved from your income statement and include, among others, adjustments for depreciation and impairments, write-downs of inventories, provisions, financial results and income taxes.
Subsequently, the statement is organised into the three standard sections: cash generated from operating activities, investing activities and financing activities. In these sections, cash variations are considered alongside the income statement data.
We demonstrate the functionality of this automated cash flow statement using an example.
Property, plant and equipment
Suppose you acquired some additional equipment for 5 MEUR and you sold some machinery for 1 MEUR. Additionally, you recorded depreciation expenses for an amount of 10 MEUR.
The standard accounting entries are shown in black below. Additionally, we include the specific variations in orange to produce an automated cash flow statement.
Acquiring equipment for 5 MEUR, of which only 2 MEUR was directly paid:
| DT Plant, machinery and equipment, purchase value (F10) | 5.000.000 |
| CT Trade payables 3rd parties (F80) | -3.000.000 |
| CT Cash and cash equivalents (F80) | -2.000.000 |
Selling machinery for 1 MEUR, with NBV of 500 KEUR, resulting in a gain of 500 KEUR:
| CT Plant, machinery and equipment, purchase value (F15) | -2.000.000 |
| DT Plant, machinery and equipment, depreciation (F15) | 1.500.000 |
| CT Gain on disposal of property, plant and equipment (P/L) | -500.000 |
| DT Cash and cash equivalents (F80) | 1.000.000 |
Depreciation expenses of 10 MEUR:
| DT Depreciation of plant, machinery and equipment (P/L) | 10.000.000 |
| CT Plant, machinery and equipment, depreciation (F20) | -10.000.000 |
Considering the financial statements, including the automated cash flow statement, we observe that these transactions result in a total cash impact of 1 MEUR, derived from net cash generated from operating activities of 3 MEUR and net cash used in investing activities of 4 MEUR.
The net result for the period comprises entirely non-cash items, requiring adjustments. The net cash from operating activities includes 3 MEUR not yet paid for the acquisition of equipment, which is therefore included in trade payables. The net cash used in investing activities includes 1 MEUR in proceeds from the sale of machinery, alongside 5 MEUR related to the acquisition of equipment.
Provisions and Loans & Borrowings
Suppose you also settled a legal claim, resulting in a payment of 2.5 MEUR, and you released a 4 MEUR provision. Besides, you repaid a loan of 3 MEUR and secured a new loan of 1.5 MEUR.
The standard accounting entries are shown in black below. Additionally, we include the specific variations in orange to generate an automated cash flow statement.
Payment of 2.5 MEUR and release of 4 MEUR from provision:
| DT Provisions for penalties, legal claims and other - Non-current portion (F20) | 4.000.000 |
| CT Releases of provisions for penalties, legal claims and other (P/L) | -4.000.000 |
| DT Provisions for penalties, legal claims and other - Current portion (F15) | 2.500.000 |
| CT Cash and cash equivalents (F80) | -2.500.000 |
Loan repayment of 3 MEUR and new loan of 1.5 MEUR:
| DT Cash and cash equivalents (F80) | 1.500.000 |
| CT Other loans & borrowings - Non-current portion (F10) | -1.500.000 |
| DT Other loans & borrowings - Current portion (F15) | 3.000.000 |
| CT Cash and cash equivalents (F80) | -3.000.000 |
Considering the financial statements, including the automated cash flow statement, we observe that these transactions result in a total cash impact of 5 MEUR, derived from net cash generated from operating activities of 500 KEUR, net cash used in investing activities of 4 MEUR and net cash used in financing activities of 1.5 MEUR.
The net result for the period is still driven solely by non-cash items, including an additional provision adjustment of 4 MEUR related to the provision release. The net cash from operating activities is supplemented by the 2.5 MEUR payment following the settlement of a legal claim. The net cash used in investing activities remains at 4 MEUR. The net cash used in financing activities includes the repayment of a 3 MEUR loan and the issuance of a new loan for 1.5 MEUR.
Verification
When configuring the CCH Tagetik automated cash flow statement, we define a "preferred" variation for each balance sheet item. As a result, all movements on your balance sheet accounts will be automatically posted on this preferred variation, saving time for finance people, who only need to verify if these movements are accurately explained by this preferred variation or transfer them to another variation if more convenient.
Additionally, controls can be implemented to ensure that financial data is properly reported. For example, a dedicated "Reconciliation account" (F85) captures incorrectly reported data for finance people to correct. It is also advisable to fix the signing on certain variations like the "Cash additions" variation (always positive) and "Cash disposals" variation (always negative). Furthermore, some variations can be restricted from being applied to specific accounts, preventing incorrect inputs. The input of variations can also be made user-dependent, allowing, for instance, Admin users to make additional corrections. This can also be accomplished by integrating a dedicated cash flow adjustment category in your datamodel, on which Admin users can make direct changes to the reported cash flow statement. Accordingly, almost all desired checks can be built in according to your needs.
Conclusion
To conclude, the cash flow statement is one of the three essential financial statements used by financial leaders. Alongside the balance sheet and income statement, it offers crucial financial data informing business decision-making. While all three statements are essential for assessing a company's financial health, many business leaders consider the cash flow statement as the most critical one. So, what are you waiting for? Contact us today to kick-start your cash flow statement reporting.
