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Cash flow in hfm – simplified

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  • 1. Cash Flow in HFM Simplified Chris Barbieri Copyright ©2013 by Chris Barbieri, Edgewater Ranzal
  • 2. Agenda What is cash flow and why do we need it? What are the primary issues that need to be considered with the design? What is a straight forward method for creating cash flow in HFM? How can I offend serious accountants through oversimplification? Copyright ©2013 by Chris Barbieri, Edgewater Ranzal
  • 3. Thanks! To Jim Heflin aka “Jim The Rules Guy” For making this possible Copyright ©2013 by Chris Barbieri, Edgewater Ranzal
  • 4. What is Cash Flow? The movement of cash into or out of a business, project, or financial product. The (total) net cash flow of a company over a period (typically a quarter or a full year) is equal to the change in cash balance over this period ● Positive if the cash balance increases (more cash becomes available) ● Negative if the cash balance decreases. Copyright ©2013 by Chris Barbieri, Edgewater Ranzal
  • 5. More Specifically Year to date cash flow is generally seen as the difference between the beginning balance of a balance sheet account (last year ending) and the current balance of the account. Increase in an asset account is a use of cash ● Subtracted from total cash flow. ● You buy inventory – so you spend cash Increase in a liability account is a source of cash ● Added to total cash flow. ● You borrow money – which increases cash on hand Copyright ©2013 by Chris Barbieri, Edgewater Ranzal
  • 6. Cash Flow Statement Copyright ©2013 by Chris Barbieri, Edgewater Ranzal
  • 7. Operational cash flows Cash received or expended as a result of the company's internal business activities. Includes cash earnings plus changes to working capital. Over the medium term this must be net positive if the company is to remain solvent. Copyright ©2013 by Chris Barbieri, Edgewater Ranzal
  • 8. Investment cash flows Cash received from the sale of long-life assets, or spent on capital expenditure ● Investments ● Acquisitions ● Long-life assets Copyright ©2013 by Chris Barbieri, Edgewater Ranzal
  • 9. Financing cash flows Cash received ● From the issuance of debt and equity Cash paid out ● Dividends ● Share repurchases ● Debt repayments. Copyright ©2013 by Chris Barbieri, Edgewater Ranzal
  • 10. Why should you care? Cash Flow Statement is one of the three primary financial statements that all businesses utilize Automation of the Cash Flow Statement can be done in HFM Unlike the Income Statement and Balance Sheet, the Cash Flow Statement is primarily driven by HFM rules The complexity varies a lot based on the design Copyright ©2013 by Chris Barbieri, Edgewater Ranzal
  • 11. Broad Design Objectives Create the cash flow in a way that lends itself to external report presentation. The design must also allow for easy analysis internally. The design should automate data movement to minimize user input. Maintenance should be simple and a function of metadata instead of rules where possible. Copyright ©2013 by Chris Barbieri, Edgewater Ranzal
  • 12. Specific Design Considerations Currency translation must be addressed. Re-classes between financial statement line items need to be facilitated Intercompany eliminations need to be accurately reflected. Populate beginning and ending cash accounts Source of the beginning balances may not be in the same scenario where the calculations occur Copyright ©2013 by Chris Barbieri, Edgewater Ranzal
  • 13. Cash Flow Account Design This will be a major account section like the P&L or Balance Sheet. The cash flow accounts are prefixed with “CF” or “CF_” The name of the cash flow account is the same as the balance sheet account it will source for data. Copyright ©2013 by Chris Barbieri, Edgewater Ranzal
  • 14. Cash Flow Account Design (cont’d) This structure will directly support reporting. The cash flow account descriptions are the cash flow report lines. The primary maintenance point is in the metadata instead of the rules. Copyright ©2013 by Chris Barbieri, Edgewater Ranzal
  • 15. Cash Flow Account Attributes The account type is Revenue ● This will allow us to display Periodic, QTD, or YTD on a report. ● This will also cause the flow to translate at the average rate. ● This will assist better / (worse) type reporting. Custom dimension attached facilitates the data by source Copyright ©2013 by Chris Barbieri, Edgewater Ranzal
  • 16. Cash Flow Custom Dimension Attached to each cash flow account Facilitates: ● Ease of analysis ● Clarity of cash flow line re-classes ● Natural Reporting Copyright ©2013 by Chris Barbieri, Edgewater Ranzal
  • 17. Walking Through the Process HFM rules cycle through cash flow accounts. ● HS.Account.IsBase(“CF”,sAccount) Prefix “CF_” is removed to reveal the source account ● Def_Tax Cash flow account = change in source account Copyright ©2013 by Chris Barbieri, Edgewater Ranzal
  • 18. Cash Flow Process (cont’d) Custom destination is the CF_Calc member. Stores the Balance Sheet change ● …or the P&L amount Run at the Value dimensions: ● Entity Currency – base level entities ● Any Adjustments ● Elimination Copyright ©2013 by Chris Barbieri, Edgewater Ranzal
  • 19. Where These Cash Flow Rules Run Change in the balance sheet do not run in ● <Entity Currency> in parent entities ● <Parent Currency> Reason is: ● Actual cash flow must translate at the P&L rate ● Average Rate ● And Periodic method Running in the above locations would overwrite the flows translating at the Average rate. Copyright ©2013 by Chris Barbieri, Edgewater Ranzal
  • 20. Cash Flow Re-classes A simple change in the Balance Sheet may accommodate 90% of the volume ● Re-classes will be required. How the adjustments are displayed varies greatly between businesses. There is no single pattern. What do you need to report? Copyright ©2013 by Chris Barbieri, Edgewater Ranzal
  • 21. Cash Flow Re-classes - Sources The adjustments populate for several places. Roll forwards and Stat accounts are typical sources. Some re-classes will require data / manual input or journals. Copyright ©2013 by Chris Barbieri, Edgewater Ranzal
  • 22. Effect of Exchange Rate Cash Changes Several simple ways to accomplish this First is to determine CTA on the cash account itself ● Determined from the Cash account by recording the change in cash similar to any other balance sheet account. The flow will translate at the Average rate. ● Then calculate the difference in the cash account after translations. ● Difference between these two numbers is CTA on the cash account (and cash flow). Copyright ©2013 by Chris Barbieri, Edgewater Ranzal
  • 23. Effect of Exchange Rate Cash Changes 2 A second method is the “Top of House” plug back The calculated cash flow itself was translated at the Average rate Determine the change in the Cash account The difference is the FX on cash. ● This method has risk, as any cash flow problems will end up in the FX account Copyright ©2013 by Chris Barbieri, Edgewater Ranzal
  • 24. Beginning and Ending Cash Accounts For ease of reporting, create: ● Beginning ● and ending cash accounts Avoids needing different custom dimensions in the rows of the cash flow report A simple method is to ● Pull the prior year ending cash balance into one account ● and current cash balance into the ending account Most cash flow is calculated on a YTD basis Copyright ©2013 by Chris Barbieri, Edgewater Ranzal
  • 25. Beginning Cash - Dynamic Nicer to use Dynamic accounts ● Easy to see Periodic and Quarter to Date cash flow Non-Dynamic holding accounts are populated with the cash balance from the prior month or prior year ending. Based on the view setting one of those accounts is used to populate the dynamic beginning cash account. HS.Dynamic “A#CF_Beginning.W#Periodic = A#CF_Cash_Beg_Prior_Month Copyright ©2013 by Chris Barbieri, Edgewater Ranzal
  • 26. Cash Flow Validation Check the result of the cash flow calculations! ● Populate a validation account that compares change in cash account(s) with calculated cash flow If you populated beginning and ending accounts you can use them to determine the change. ● Not dynamic This is one of the final steps once the cash flow is working Note: If you plugged the FX with the difference this is not possible. Copyright ©2013 by Chris Barbieri, Edgewater Ranzal
  • 27. Cash Flow Validation - Dynamic The cash flow validation can also be dynamic. If you have populated beginning and ending accounts this really becomes simple. You only need one statement similar to this per view. HS.Dynamic “A#CF_Validation.W#Periodic = A#CF_Cash_Flow_From_Calculations -(A#CF_Cash_End – A#CF_Cash_Beg_Prior_Month)” Copyright ©2013 by Chris Barbieri, Edgewater Ranzal
  • 28. Other Considerations - Source Scenarios Beginning balance may not always reside in the same scenario as where the cash flow is being calculated. This is common in Budget and Forecast scenarios A simple way to address this is to populated a beginning scenario variable. When the beginning balance is prior year ending, this variable specifies the scenario from which to pull the data. Copyright ©2013 by Chris Barbieri, Edgewater Ranzal
  • 29. Chris Barbieri cbarbieri@ranzal.com Needham, MA USA +1.617.480.6173 www.ranzal.com Copyright ©2013 by Chris Barbieri, Edgewater Ranzal