It all starts with the indirect method, the most commonly used presentation format for cash flow statements. There are many reasons why the indirect method prevails over the direct method; mostly because the indirect method can be derived from financial accounting information and thus is relatively easy to prepare. Most financials unfortunately struggle to really understand what an abstract measure like ‘operating profit adjusted for changes in working capital’ really means. Here are three quick wins to get more value from cash flow statements, even when using the indirect method.

1. Reorganizing the balance sheet

Funny enough, it all starts with the balance sheet. Corporations generally elect to present and review balance sheets according a GAAP lay out, meaning assets on the one hand, and equity and liabilities on the other hand. This traditional lay out does not promote easy insights into operating performance and value, as it mixes together operating, investing and financing activities. A better practice would be to implement a derivative lay out that organizes the balance sheet by capital employed – operating and investing activities – versus funds provided – equity and net debt, and thus financing activities. This lay out provides a valuable connection to the three main captions of the cash flow statement.

2. Reorganizing working capital

With operating activities separately visible on the balance sheet it is also recommendable to prepare a crystal-clear definition of working capital. As a first measure, trade working capital and non-trade working capital should be identified. Trade items relate to those assets and liabilities that are directly linked to revenue and operating expenses. Those trade items in turn can be grouped into sections related to customers, suppliers, employees and tax authorities. Having trade working capital organized as such provides two powerful opportunities: on the one hand to come up with good DSO/DPO/DIO definitions, and on the other hand to provide a more ‘direct’ view on cash flow by linking each of the separate components of income statement to their counterparts in trade working capital.

3. Reorganizing cash flow forecasting

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.

Casper van Leeuwen is executive partner at Satriun, an international Corporate Performance Management consultancy with offices in the Netherlands, Switzerland, France, Germany, Romania, Israel and Belgium. Satriun advises large corporations in the areas of financial consolidation, budgeting & planning, and management reporting.