CFO’s Guide to Financially Intelligent Cash Flow Management

cfo cash flow

Cash flows can be measured in an effective, timely manner; and, to repeat, cash data can be much more understandable and give a clearer financial picture than an income statement. The comparison of budgeted to actual receipts and disbursements often gives a much clearer financial picture than reported revenues and expenses and net income on a generally accepted accounting principles (“GAAP”) income statement. Discussions about the causes of cash flow variances can uncover problems and opportunities law firm bookkeeping without the need for approximations or adjustments. The cash flows either did, or did not, occur within the particular time period. In routine business, there are many transactions, which require subjective assessment whether they fall under operating or investing or financing, or under the current or non-current section. Therefore, investors would find that many times, the data derived from the changes in the balance sheet will only approximately match the figures in the cash flow statement.

In effect, this leads to the creation of line items such as accounts receivable which is counted as revenue recognized on the income statement, but whose cash payment has not actually been received yet. Investors should be aware of these considerations when comparing the cash flow of different companies. Typically, a budget is shown for an entire year, or an otherwise specific period, and reflects all relevant income and expenditure for that period of time. On the other hand, a cash flow forecast shows the expected cash coming in and out, and it usually divides transactions into monthly columns.

Making Sense: Cash Flow Analysis, Forecasting, and Management

Conversely, an increase in AP indicates that expenses were incurred and booked on an accrual basis that has not yet been paid. This increase in AP would need to be added back to net income to find the true cash impact. All the above mentioned figures included above are available as standard line items in the cash flow statements of various companies. For example, if a customer buys a $500 widget on credit, the sale has been made but the cash has not yet been received. The revenue is still recognized by the company in the month of the sale, and it shows up in net income on its income statement. When the situation is this volatile, business leaders need up-to-the-minute information, so finance teams need to track all of these numbers in real time.

At any point in time, the Companies Act and Income Tax Act may treat different income and expenses differently. This creates deferred tax assets (DTA) and deferred tax liabilities (DTL). Moreover, to understand how changes in the provisions in the balance sheet impact the calculations of CFO, an investor needs to treat their changes just like current liabilities.

How to calculate changes in trade receivables/payables for the cash flow statement?

I am happy that you are doing your own stock analysis and are envisaging different scenarios/ratios/formulas which as per you represent the correct picture of the financial position of the company. If we do not add the positive change due to reduction of inventory in CFO, then the CFO will be unduly reduced from inventory write-down losses (which is a non-cash item). We believe that in such cases of inventory write-down only a case to case based awareness is sufficient for investors and no change to the general method of CFO calculation is needed.

cfo cash flow

To maintain liquidity, a CFO must speed up cash collections and carefully monitor accounts payable. CFOs must manage both short term and long term cash needs, while maintaining good relationships with vendors. Stampli provides a more modern way to control spending and manage cash outflows.

Company’s Performance

But these companies still manage to give multi-bagger results almost seven times within a year. Thank you so much for all the wonderful analysis and in fact the whole website. I have learnt more in the last week reading your blog than what I learnt (and apply) during MBA days.

Therefore, on an overall basis, this company would never match cPAT with cCFO. Let us take ownership of your finance function so you can spend your time doing what you really want to do… Get the free daily newsletter with financial industry insights and practical advice for CFOs. Once benchmarks are compared with current KPIs, the CFO can prioritize focus areas and gain alignment with the executive team for execution.