It is surprising to see that corporations can ask financials the impossible: to forecast a balance sheet. A balance sheet is a statement at a particular point in time – it is the logical end result of the transactions occurring up to that point in time. Therefore, forecasting should be all about income statement and cash flow statement. Utilizing reliable DSO/DPO/DIO definitions on top of the income statement allows to pretty accurately predict the evolution of working capital. Add on top forecasts for capital expenditure, income tax payments and payments from provisions and you already come to a solid free cash flow definition for your operations. This is the type of accountability you want to delegate, while keeping more ‘corporate’ elements such as the funding decision in the hands of treasury. Don’t bother asking your operations for a full balance sheet and cash flow – stick to capital employed and free cash flow instead.
Implementing these three quick wins already can boost the value added that cash flow statements bring to the performance management of the corporation. Taking cash flow to the next level – breaking it down by cash generating unit that may involve segmentation by division or product group – may be more complex and may require adaptations to how financial information is captured within the accounting ledgers.