For any organization, cash flow reporting and analysis can be one of the biggest challenges during financial planning activities and one of the biggest drivers in decision-making. Because of this fact and the quick turnaround financial planners and executives desire, providing a flexible and accurate cash flow model is imperative for an organization’s success.
To that end, Oracle Cloud EPM offers a breadth of options, both out-of-the-box and custom, to model cash flow consolidated reporting, planning, and analysis. Knowing what to do and where to do it can drive massive success in EPM tool implementation and sustainable financial reporting and analysis activities.
In this on-demand webinar, we dive into the nitty gritty of cash flows to help you fully understand how utilizing Oracle Cloud EPM will elevate your financial process and reporting needs. Topics covered in the webinar will include:
- The basic components of a successful cash flow model.
- Simple, input-driven models and how they can be used effectively.
- Out-of-the-box cash flow in Oracle Cloud EPM (Financial Consolidation and Close and Planning Modules) and how it works.
- Taking the Oracle Cloud EPM models to the next step.
- Rigorous custom cash flow models and how they work best.
- How to find the right balance of cash flow complexity and effectiveness.
For a downloadable version of the presentation, click here.
Our Speaker
Ezra Fishman | Senior Manager, Business Performance Management
Please reach out to our team if you have any questions on how to take your cash flow model and analysis to the next level.
Transcript
Ezra Fishman: Good afternoon. My name is Ezra Fishman. I am with SC&H Group. We’re going to be talking today about cash flow in the EPM systems. I have the title, “It’s My Cash Flow and I Want it Now,” if anyone remembers those commercials from way back when. We’re going to be talking through three topics here tonight.
- First, we’re going to talk about cash flow analysis, what it is, and how it works.
- Then we’re going to talk about cash flow in financial consolidation and close.
- Finally, we’re going to talk about cash flow in planning. We’ll talk about how they’re similar and how they’re different.
About SC&H Group
In terms of who we are, we are SC&H Group. We have been a firm for about 30 years and now we’ve been in the EPM industry for about 20 plus. We offer all kinds of services across all kinds of industries. In particular, our group is the Business Performance Management Group. We work in a number of areas. We have a lot of expertise, in particular, coming from the EPM field. We’ve spent a lot of time focusing on business transformation and software and enterprise software transformation. Our support in particular comes in on the EPM side, but we help you with the entire roadmap from start to finish. You can see here we have a whole bunch of different clients across all industries on the slide that will come afterward. Everybody can take a deeper dive.
An Introduction to Cash Flow Analysis
Okay with that. Let’s talk about cash flow. So what is cash and how does it flow? I believe everyone should be pretty familiar with cash and any legal tender that can be used to exchange goods, debt or services, economic entities, so that’s individuals, companies, municipalities, businesses require cash to support their activities. Obviously, with cash you can procure goods and services, you can pay your employees, invest in assets, and then cover other expenses, your taxes, your interest fees, etc.. In order to collect cash, you can sell goods and services, you can collect taxes and fees, secure financing, and receive grants or other support payments. You get cash. You spend cash. These are the different ways you can get to it.
Why Does Cash flow Matter?
In order to remain solvent, everybody must have enough cash to cover expenses in a timely manner. So without your cash, you can default on debt, which leads to pretty severe consequences across the board, obviously. With that cash, you also might not be able to procure resources required to complete your operations. To be able to both succeed in your operations and also not default on any debt, it’s important to make sure you always have cash to cover the costs as they come across. Having a successful business doesn’t necessarily lead to successful cash flow management. So, if you have revenues but they’re not generating cash, that’s not going to help you pay your bills on time. You can have expenses where you’re paying cash for inventory, for example, but you’re holding onto inventory long enough that you don’t collect the cash you need to pay for it and you can have debt payments that come up at times when you don’t necessarily have cash for them. So, it’s important to keep on top of when you’re going to have cash to make sure that you can deploy it when you need it. You can also have an unsuccessful business but have successful cash flow management. They don’t necessarily go hand in hand. As long as you can get cash, you can cover your operations, even if you’re not necessarily succeeding as a business.
How Does Cash Flow Analysis Work?
The goal is to track inflows and outflows and project future cash movements. This can include tracking all of your cash transactions and classifying them. So how are we getting cash? How are we spending cash? Tracking business activities that use and generate cash and deriving movements based on those findings. So, if you know you’re going to have $1,000,000 in sales this year, you can track out when you expect to get cash from them. You can review your outstanding receivables, payables, and inventory to project future cash collection timings, and you can project future activities that impact cash requirements when you do your planning and your budgeting. You can get a sense of when you think cash will come in based on that plan. Cash flow analysis can be maintained on a periodic basis in real-time, depending on operational needs. A lot of businesses you’ll see will complete cash flow analysis in quarterly or annual planning activities. But in cash flow statements, you’ll see in most public company reporting and financial reporting, certainly year-end reporting, but you’ll see in a lot of places they will do pretty rapid cash flow analysis because you want to make sure that any opportunity that you have where you can deploy your cash and make a profit off of it, the more on top of what cash you have and when you’re going to have it will allow you to make those decisions more effectively and get those opportunities when they’re available.
How do Cash Flow Statements Work?
Cash flow statements are going to organize your cash flow analysis into a standardized template, the goal being for every entity to have the exact same format for a cash flow statement. If you need to compare your different entries and see who’s going to have cash, when is this company going to be more salient than this other one, you’re going to want to make sure that you have that same reporting across the board for every single entity. However, the templates do vary slightly based on reporting requirements. So your IFRS cash flow statement, your GAAP cash flow statement, your own internal budget, those things may have entirely separate templates, but generally, you’ll see the same idea of how you’re going to track each activity. Within that, there’s really the four main buckets of cash movement that we’ll talk about most of the time in analysis, in particular will show up in any cash flow statements that we’re going to be looking at.
- Operating activities, that’s your regular business activities, sales purchases, SG&A, everything that goes into day to day running of your operations.
- Investing activities, which is purchasing and selling investments like fixed assets and equity investments, things like that, more of your long-term investments.
- Financing activities, which is anything that’s related to creating debt or equity and either getting new debt, paying off your debt, getting investments, paying dividends, etc..
- Changes in cash related to fx, where foreign exchange is relevant there can also be changes in your cash availability based on foreign exchange rates. For example, your euros are going to be very differently valued now than they would have been a year ago.
What are the Methods of Cash Flow Reporting?
In terms of methodology for cash flow reporting, there’s two main methods you’ll see that are recommended across the board. There is a:
- Direct method
- Indirect method
The direct method differentiates activities based on actual cash transactions. You have a cash transaction, you record it as a cash flow. That is the same across the board. If you have an expense, you record the expense as a cash transaction. It requires pretty substantially careful data collection because in order to be able to say what all of your cash expenditures were and all of your cash incomes were, you need to actually have a record of all of those activities.
The indirect method, on the other hand, involves a little bit less of a data collection burden. Instead of differentiating your cash activities based on the actual transactions, you derive it based on your balance sheet and P&L line items. So for example, your cash flow from receivables, whereas in direct method you would just track all of the invoices that get paid. In an indirect method you would track the change in your receivables. If you have fewer receivables at the end of this month than you did last month, that means that you’ve collected cash on your receivables and so on and so forth. If your inventory goes up, that means you’ve spent money on inventory. This method relies on completeness and accuracy of your balance sheet and income statement, which hopefully you have. It’s pretty limited in some cases, particularly where a single account will track multiple activities. The biggest example being your fixed assets.
Let’s say that you have 100 different cars on your line. If you buy five new ones and sell three of them, your net change is going to be two, but you’re not going to really have insight on how many you’ve bought and how many you sold just on the net change. So, that’s one thing that the indirect method means a little bit of supplemental work on because you can’t derive that just from your financial statements. Most entities we’ve seen prefer using the indirect method. It’s much less of a data burden to run the indirect method than the direct method because you’re able to use financial statements you’re already creating instead of just doing an entirely separate data collection effort. However, you’ll see a lot of the accounting words such as GAAP and IFRS. We’ll recommend doing the direct method if possible, because you will get more accurate results because you’ll truly have the activity that occurs instead of just deriving it based on other data. In terms of what these look like.
Direct Method Cash Flow – Key Concepts
Direct method cash flow reporting, relies on accurate tracking of all of your transactions. For example, cash collected from customers will be a line item, wages paid would be a line item, income taxes paid will be a line item separately because all of these transactions are clearly defined and differentiated. FASB recommends using this method. However, like we mentioned, due to the complexities with this method, you’ll see most companies prefer the indirect method to simplify the process a lot.
Indirect Method Cash Flow – Key Concepts
For the indirect method, cash flow reporting uses change in account balances. What we’re talking about here is every single financial account on your balance sheet and your income statement must be used in your generating of your cash flow statement. The basic concept being, if you look at your balance sheet and income statement. Your cash should change in an equal and opposite way to everything else. If you have a decrease in all of your other balance sheet items of $200, in order for the balance sheet to balance your cash will need to have increased by $200. For example, if your AR goes up, that means that you haven’t been collecting as much cash. So you can derive that you have less cash at the end of the month. Same thing with dividends payable. If your dividends payable goes down, that means that you have spent cash and so you have less cash available at the end of the month. Generally, the way these statements work are using the reported net income. We’ll talk a little bit more about what those look like, but the idea is when you start with cash inflows, the easiest place to start is how your business has done. You have revenues and you have expenses. Theoretically, your cash should more or less line up with your income. With that, however, there are some adjustments that need to be made. For example, depreciation, amortization, those types of expenses aren’t necessarily cash expenses, so you need to pull those out, sort of the same way that you’d pull them out for some tax reporting.
Additionally, you need to look at everything else on the balance sheet so you can really figure out what’s the real change in cash. Because like we said, if you have income but you don’t collect the cash on them, if your receivables go up, you’re not actually collecting any cash, you’re not really getting cash flow there. When you look at your full operating activities using the combination of your true cash net income and your changes in the current assets and current liabilities that support that income, you’ll be able to generate those true operating activities. We’ll talk about that. Some of these line items will have multiple places that they show up within your cash flow statement, the big one being CapEx, for example. We’ll see that there are some sort of manual adjustments that most companies will need to make in order to truly get that cash flow statement to represent all of the activity that needs to be reported.
Other Key Cash Flow Metrics
We’re going to talk a lot about cash flow statement and that indirect method, those line items, operating financing and investing. But there are some other key metrics that do come up in cash flow that you’ll see a lot of these are either derived from or support these cash flow statements.
The first one is free cash flow. You’ll see this a lot in your financial reports for companies. When you’re looking at investing in valuing companies, free cash flow is simply the cash generated to support the operations of the business, including capital asset management. It’s basically the cash you need to be able to support all of the operations and everything you need in order to be able to complete those operations. It focuses just on that operating section as well as CapEx. So it’s going to ignore your investing and financing activities and because this is a metric of specifically how the business is supporting its operations, you’ll see this used a lot more in valuation and tracking of a company’s solvency because it will show you truly what’s happening in the business, ignoring all of the other ways the cash income are coming in and out.
The other one that you’ll see a lot and this is something that really takes a little more looking into than necessarily gets attention all the time is what we call our cash conversion cycle. What that is, is basically a track of how long it takes from when you spend cash to when you get it back. This is pretty important for running a business. Obviously, you want to get your cash back as soon as possible, like we mentioned, so that you can use it to invest or to continue to operate the business. There’s three different metrics that are included in there:
- Days payable outstanding (DPO)
- Days inventory outstanding (DIO)
- Days sales outstanding (DSO)
Your payables outstanding is how long on average it takes for you to pay off your inventory purchases. For example, if it takes you 15 days to pay off your inventory, you’ll have more cash available than if you were to try to pay those off within ten days. Same thing with days inventory outstanding. That’s how long on average it takes from when inventory is generated to convert it into sales. The longer that you have your inventory sitting as inventory, the less cash you’ll have available because it’ll be soaked up in those inventory assets. Then on the flip side, your days sales outstanding is going to be how long it takes from when you make a sale to collect the cash on your sales.
If you look through these, you’re DIO and your DSO are how long it takes from when you have inventory to when you collect the cash on it. It’s inventory to sales and then sales to cash. Then if you take that number, the amount of time it takes from when you have inventory to when you sell it and collect the cash and you subtract out the amount of days that you took before you paid for that inventory, that net amount is how long it takes to convert the amount of cash that you’re spending on that inventory to the cash that you’re collecting from the customers. Obviously, a smaller number of days is better. You’ll see a lot of companies, especially in manufacturing, put a lot of focus on these metrics for that reason. So, that’s cash flow overall.
Cash Flow Models in EPM – Overview
Let’s talk about how cash flow works in EPM cloud. In EPM Cloud, you have several options for how to do this analysis and reporting. The two biggest ones are financial consolidation and close, which is where you’re going to do your actual consolidations and usually your cash flow statements that are going to be used for external reporting and your planning application, where you’re going to be primarily during your planning, budgeting, forecasting, and your comparison reporting to your actuals. Within those, and we’re going to talk through each of these in a lot more detail, you can use custom calculations for indirect method calculations in FCC. There’s standard system functionality, but there are some custom artifacts we’ll talk about. You’ll also see some data entry forms for either companies that choose not to use the full FCC functionality or for adjustments that aren’t necessarily supported by calculations you’ll create. On the planning side of things, cash flow analysis can be completed using either direct inputs, so if you don’t want to use a full, rigorous system functionality or you want to plan outside the system, you can just post the data to planning as calculated results. Or similar to FCC, you can actually build calculations that will do your cash flow for you. I will talk in a lot of detail about what each of those are and how they work.
Cash Flow in Financial Consolidation and Close
Let’s start by talking about financial consolidation and close. In FCC, there’s default system functionality that natively supports cash flow analysis using what’s called the movement dimension. It’s basically a separate dimension in addition to the account dimension that allows you to track both the nature of financial activities and the source of those activities. So your account dimension will line up with your P&L on balance sheet line items in particular. You’ll see this is revenue. This is expenses. This is an asset. This is the liability. That movement dimension lets you track where that activity comes from. Is this asset change something that we purchased or something that we sold? Is this income, cash income or non-cash income? That movement dimension lets you track that detail, which is going to be very important for that indirect cash flow statement. In that movement dimension, they’re going to be three hierarchies that support that cash flow statement.
There’s the primary hierarchy, which is tracing activity from opening to closing balance. So you’ll start with your opening balance, then the movements will add or subtract from that to get you to your net activity in the month and then to your closing balance.
On the other hand, you have your cash flow statement, which instead of tracking the opening and closing balance of your balance sheet and an income statement line items, is going to track your movements as additions and subtractions from cash. For an example, your main movement hierarchy wouldn’t treat an increase in accounts receivable as an increase in closing balance. In this cash flow hierarchy, you would see it projected the opposite way. We’d see that increase in accounts receivable is actually a decrease in cash.
Finally, we’ll see that there’s also a cash change hierarchy, which has a couple of additional line items that don’t show up in that cash flow hierarchy. In particular, things like opening and closing downs of cash specifically, and fx impact, which is calculated automatically by FCC, so it isn’t included in part of that primary cash flow hierarchy.
The Movement Dimension
Let’s talk about what these look like. We have these three hierarchies here.
- FCCS Movements Hierarchy
- We have that main movements hierarchy, which you can see starts with closing balance and within there opening balance and adjustments. You’ll see in here we have our operating, investing, financing, and fx movements in cash, all of your most important parts of your indirect cash flow statement.
- FCCS Cash Flow Hierarchy
- Down here, we have our FCCS cash flow hierarchy, which is your actual cash flow statement, which again has operating, investing, and financing. You’ll notice it does not have this movements of cash line item that shows up in that movement’s hierarchy.
- FCCS Cash Change Hierarchy
- In that last hierarchy, that cash change hierarchy is where you’ll get all of your cash movements. So that’s your opening balance of cash, your fx change in cash, and your closing balance of cash. Between cash flow and cash change, you’ll get the entirety of your activity between both non-cash changes and cash changes.
The Account Dimension
Within your account dimension, like we discussed, that account dimension is going to really be used for your balance sheet and income statement. The one place where you do actually have an ultimate hierarchy is what we call our cash and non cash balance sheet. What this is basically doing is like we discussed, that indirect method is taking everything but cash and tracking the change in those balances because the change in cash will be the direct inverse of the change in every other account so that your balance sheet nets to zero. This kind of hierarchy basically sets that up where it says, I have everything on my balance sheet that is noncash as one roll up and my current total cash is the other line item. So together we get the net change that we can use for our cash flow statement.
Data Creation in FCC
In terms of how data is getting into FCC for cash flow. The first step is going to be loading data into the system generally through data management, which you’ll see primarily based on the GL account string coming in. Native data management functionality will allow you to map those line items to a single movement member. There’s going to be cases like we discussed where accounts are going to need to be split between multiple movement line items. You are going to be able to set a single movement for each individual line of data. From there, once data is loaded in FCC, calculations can be utilized to reclass certain data where applicable, in particular net income add-backs, which is basically taking all of the non-cash expenses and adding them back to get your true cash income and the equivalent offsets in investing and financing. We’ll talk about why that exists. They can either be created as on-demand or insertion rules in the calculation process. Then once those calculations are completed, there are going to be some annual adjustments that occur, generally in your investing and financing sections. We’ll see most people will either complete those using smart view or in data form within the FCC tool.
Cash Flow Mappings
We can see here, this is sort of a generic mapping of movement data into an FCC application. You can see here my source values are going to be GL accounts and my target value is going to be our movements here. You can see all of our movements are going to start with fCC underscored movements. You can see here with every individual account line item, you get the opportunity to decide which default movement is going to be used. At the bottom here, you can see in any case where we don’t have a specific movement line item we’ve mapped it to net income under the assumption that if it’s not balance sheet activity, it will have to be income activity.
Cash Flow Adjustment Forms
Then in terms of adjustments, so once you get that data loaded and you get the calculations done, you’ll have a form that generally looks something like this. If you do your cash flow offline in Excel, it’ll look generally pretty similar to this form. But the basic idea being you can use this form to check your adjustments and get from the calculated system cash flow to the actual cash flow statement as you need it.
Cash Flow in FCC Cardinal Rules
In terms of these cash flow calculations and how you need to create them, this is extremely important. This is sort of the biggest challenge with these cash flows.
The first thing is every single account must be mapped to a movement. It is critical that every single balance sheet and income statement account has a mapping. The reason for that being change in cash is exactly the inverse of change in all other accounts. So if you don’t have every other account showing up in the movement dimension you are going to miss that activity when you try to complete the cash flow statement and it won’t tie to your change in cash.
Next, every account needs to exactly balance once in the movement dimension. Each account is going to be mapped to a movement initial data load. When accounts need to have adjustments between line items, for example, depreciation expense is going to get loaded to the net income line on the cash flow statement and when you need to move it into an add-back depreciation line to adjust to your cash income, you also need to subtract it from another place in the cash flow statement and in that movement dimension, because in total you want your depreciation expense to only show up once. If we only create the add-back for it, it’s not going to balance out. So what you see is for every single account, there will be either one, three, five, an odd number amount of movements that are populated with data from that account in order to ensure that in total the balance in that movement dimension exactly matches the true balance of activity within that account.
In addition to that, when movement members are added, you need to add them both to the movement’s hierarchy and the alternate cash flow hierarchy, obviously, because you’ll need to make sure that both line up in order for your balance changes to match. When you create a non-cash account, you need to make sure it’s represented in that non-cash balance sheet hierarchy. Generally, you’ll see if I scroll back up here, you can see that in our non-cash section we’re using roll up there specifically to avoid that. You want to make sure that every single account will be available in there in order to populate that cash flow statement.
Custom Calculations
Once you follow all those rules, you then get to our custom calculations. Base data will be mapped to a single default movement, but our calculations can populate indirect methods usually your add-back to net income. Each portion of that calculation must include an adjustment and an offset, so that the total balance only shows up once. Generally our syntax is going to look pretty similar between each of these rules. Basically, you’re going to fix on your account. So each account that needs to be adjusted in your cash flow statement, you’re going to copy that data to the appropriate movement that it needs to be added to and then put that same data to an offset, multiply it by negative one, so in total, your net change was zero. While you see that data in all of the movements it needs to be represented within. Generally, we recommend running what’s called an on-demand rule, which is to say that after you load the data, you’ll go in and either click a button to run the rule or it is included as part of a separate automated process, rather than running what we call an insertion rule where it runs every time data is consolidated. The reason for that being, a lot of times you’ll make journal entries or adjustments that won’t actually affect your cash flow. It’ll stay cash neutral. In those cases, there’s no reason to run a cash flow calculation again, and so you’d just be able to run the consolidation, excluding any cash flow adjustments.
Cash Flow Rules
In terms of what that rule looks like. I’ll show you at a high level here. It’ll help to look at this in more detail afterwards. It’s a pretty heavy syntax. Generally, you’re going to fix on all of your dimensions except for your accounts and movements. Then within there, for each account. Starting at line 22, you can see that’s our account. We’re going to on rows 23 and 24 create the adjustment and offset to, for example, our depreciation accounts we’re going to put it to our add back depreciation line as well as to an adjustment on our investing section. Here, I chose disposals of fixed assets. You can see this is pretty consistent through here and I included two examples. A lot of these calculations might have 20 or 30 different calculations all told. Once cash flow data is fully populated in those movement members using both those adjustment forms and those calculations, we’re then going to get to our reporting.
Cash Flow Reporting in FCC
Generally, they’re all going to follow a similar template as well. Let me mention cash flow statements are usually going to be pretty much the same across the board to align with whatever policy needs to be followed. Again, I recommend going back and looking through this in more detail, but generally it’s the same sort of thing where you’re going to be using a combination of the account and movement dimension to derive your cash flow line items. We’ll share our report in the next page here. You’ll have your beginning cash, which is going to use that total cash and total non cash portion of that balance sheet. Then in your movement, you’ll go from your total opening balance through all of your cash flow movements and then through your fx impact on cash to get all the way down and populate that report in some more detail. You can see here, this is what a cash flow report would look like, where you have your movements here, as well as your accounts going up and down here to show what your actual cash flow statement will be. Again, it’s using that combination of both the movements and the account dimension. That’s our consolidation tool and we will be running through this pretty quickly with planning as well so we have plenty of time for questions.
Cash Flow Models in Planning
In terms of our planning applications. So we have no default cash flow functionality as opposed to FCC, where there’s that system baked-in functionality. There’s no default cash flow within planning, so you’re going to have to build your own. Dimensions are configured at application creation and design and created during the build process. There’s no default dimensionality, but you can build your own. For those who aren’t familiar with the EPM cloud planning tool, it lines up with the Hyperion Planning On-Premise application, which similarly did not have the native cash flow functionality and needed to be built in.
Given this, there’s a few different ways to design cash flow within the planning application. There’s a manual cash flow, which is pretty straightforward. You plan your cash flow offline and you put it into the system. There’s what we call external cash flow, which is where you do your cash flow in an alternate system such as FCC and then load it into planning via data management. Then we have calculated cash flow in one of two ways, which is either using the account dimension or using an analog to the movement dimension, like the one in FCC. We’ll talk about both of those.
Manual Activity
Generally, you’ll see a lot of companies will use FCC for their actual cash flow reporting and then load those results into planning to use for comparison and source data for future plans. For that manual activity, a lot of companies will see cash flow planning as handled by a small group of resources generally in Excel. Either you use a pretty macro intensive Excel workbook to transform P&L and balance sheet data into that cash flow statement. Usually looking something like that cash flow form that I showed you. Because a lot of users are familiar with that offline model and because they’re only a few hands on it, you’ll see a lot of companies will continue to maintain those models even after implementing EPM systems, just because there’s a lot of momentum there.
Obviously, we recommend pulling it into the EPM applications, but you’ll see a lot of companies will continue to prefer to do them offline. When that happens, users will then load those cash flows into planning as direct submission, using either data forms or smart views, and then using your standard planning, aggregation, and currency conversions, that cash flow data will then get aggregated up to make sure that it can align with your actuals for reporting purposes. That’s our manual activity. You can see here we have the same kind of thing. We have this data form that lets you post in your cash flow statement directly into the system based on that offline model.
Initiating Cash Flow in External Systems
In some cases, your cash flow is going to be initiated in external systems such as ERP or FCC applications. Generally, their systems are going to use actual data for their cash flow calculations, but you might see some external systems like a BI tool, for example, that really does driver-based growth models. Like everything else, any other data that you would want to get into planning, you can use the data management tool. Either using the same loads as the rest of the data or particularly with FCC data, you’ll be able to load the cash flow in at the same time as the rest of the data. Or you can do a separate cash flow load. Same thing with the manual planning. Once the data is into the system, you run your aggregations and conversions to make sure that it lines up with the rest of the data in the system. When you have external data matched with manually planned data, you can use forms and reports to get your comparison reporting there. So those are manual and external methods for cash flow in planning.
Custom Calculations
Beyond that, we also have our custom calculations. There are going to be two main ways those work. Basically, if you have your balance sheet and P&L in a planning application, there’s no reason you can’t run the same cash flow calculation that you can run in the FCC tool. You can see two different ways of doing this. We’ve seen a lot of both. Either an account-based model where you create basically a cash flow account hierarchy the same way that you have your P&L account roll up and your balance sheet account roll up. It gets you simplified dimensions because you don’t have to create a separate movement dimension for this purpose and you get to have that single account dimension with all of your financial statements in them, which is sort of easier to work with for a lot of users who aren’t as familiar with the tool.
On the other hand, you can also use the FCC model with an additional dimension. You can theoretically create a movement dimension, but a lot of times you’ll see people use a nature or a data type dimension that’s already in the tool to basically act as that movement dimension in FCC, which will then line up with the FCC process, so you’ll have consistency across the board. Because you have that second dimension, you’ll be able to get extra transparency that running that account-based model won’t necessarily have. Let’s talk a little bit more about both of those.
The Account Model
For the Account model, individual accounts are created for each cash flow line item similar to the movement lines in FCC. Each P&L and balance sheet account is assigned to a cash flow account. Same way, everything needs to be a movement in FCC, it needs to show up in a cash flow account in planning. As part of the calculation, you basically take the sum of all P&L and balance sheet activity associated with the cash flow line item and calculate that as that change. For example, if you take your change in AR, you calculate that by the sum of all balance changes in AR accounts. Like we said, every account needs to be included the same way as it would in any other process. Additionally, you can calculate your add-backs the same way that you would in FCC, the same way you basically have your accounts show up in an odd number of places within the hierarchy, and that calculation will support cash flow reporting. But you won’t be able to drill back into the P&L and balance sheet to get where that data came from. You’ll just see that cash flow output, which again will get you the reporting you need, which in a lot of cases is what people are really looking for. You can see here what a calculation looks like where it’s basically every single account. The change in accounts receivable account, for example, is equal to the change in balance from the prior month to the current month for the AR accounts all the way up and down there.
The FCC Model
After that, we have our FCC model. This is going to be pretty similar, what we talked about on the FCC side of things. A lot of applications have a nature or data type dimension that can be reused for this purpose. If not, a new movement dimension could be created specifically for this analysis. In these cases, when you use this FCC model, obviously, you’d use basically the same calculation method. Because FCC has some pretty particular architecture that’s different from what you’d see in a planning application, you can’t just copy and paste the script, but the syntax will be pretty similar. You just have to move a couple of things around here and there. You can then run that calculation as part of your normal consolidation and translation process or as a one-off rule. The data can either be loaded from FCC directly to those cash flow items or calculated the same way that the plan data is calculated. So, there’s our calculation methodology and you can see here the same sort of thing where we have here for each cash flow member in our, I think we have a nature dimension here. We’re setting that movement based on the change in our accounts. For example, here in our AR account.
Questions
I know there was a lot of material that I ran through pretty quickly. I wanted to make sure we had time for questions. If you have any more questions that we don’t cover here, feel free to reach out afterward. I will open up our question panel and see what we have.
Is there a way to load projections for several accounts and then compare that to actual cash-related activity?
Sure. When you have either in planning or FCC, when you’re loading in your data, the same way that you can run these calculations where we have that account show up either one or several times in that movement dimension, you can absolutely load in your different account categories and map them to one or more places. You can also use multiple versions, your sandboxes and planning, your what-if scenarios, to load in multiple different calculations or movements to get that comparison across your different what-if scenarios. Let me know if that answers that question.
Do clients want to go into more detail in default movements in FCC?
Absolutely, FCC accounts for, I want to say about 20 or 30 movements for some of our bigger clients. I’ve seen a cash flow statement with 150 line items. So you will see a lot more detail there. In a lot of cases, those custom line items will be for manual adjustments. For example, you see a line item for investment from this one debt purchase of $300 million, so it is its own separate line item. But you will see there are a lot of custom movements that can get added. Adding it in the same way you’d add in any other metadata into the application. You just want to make sure that you have everything that the client needs.
I’m going to send this slide deck out to everyone after the presentation so you can get a deeper look. I know there’s a lot of dense material here, so we’re happy to send it out. Obviously, if you have any follow-up questions, feel free to reach out to us and we’ll be happy to get those responses going. Please feel free to reach out with any questions you may have or need more information. Thank you for hopping on this webinar and learning about cash flow with us.
Moderator: Thank you so much, Ezra. We did get one more question.
Can you see projections next to actuals?
Ezra Fishman: Sure, absolutely. Let me pull up our sample report here. You can see here this is an FCC sample report I have here. So, you’ll see there are only actuals, but you can absolutely create multiple columns if you want to have your actuals in your plan as long as you’re in a system that has all of the data in it. In your planning app where you have your budget and you’re actuals, you can absolutely compare them line to line, sort of the same way you’d set up most of your other P&L or balance sheet reports. You can also put multiple years and periods in the columns if you want to track year over year or if you want to even go into your different company’s departments, you can go into that as well. You have the ability to set up that reporting however you want it to look.
