BlogsInvestor cash is at more risk than ever
Equity analysts think CFOs could do better on cash flow disclosure
By Peter Williams | Published 11:19, 20 January 12
It is easy to see why company investors should worry about cash: because chief financial officers are. The verdict of the latest Deloitte CFO survey reports that finance chiefs are due to spend 2012 worrying about how to increase their companies’ cash flow. A total of 37 percent rated increasing cash flow as a strong priority, only just behind reducing cost at 42 percent.
And while quoted companies may be slightly protected from the brunt of the recession borne by smaller counterparts, the news that there has been a 24 percent year-on-year increase in the number of companies in ‘critical’ financial distress during the last quarter of 2011 suggests that investor cash is at more risk than ever.
So how cash flows are reported by companies take on additional significance for this reporting season when issues of liquidity management are vital for both corporates and their banks.
When cash flow statements were first introduced into reports and accounts they looked pretty radical compared with their predecessor fund flow statements, which were neither used nor understood.
But two decades later cash flow statements could do with a makeover. CFOs do not use the cash flow statement they prepare for publication as a management tool in the business.
The good news is that there does seem to be growing consensus that improvement is needed. The Financial Reporting Lab - the new and experimental creation of the Financial Reporting Council - said last year that the issue of cash flow statements, among three other cash-related themes, were a hot topic.
The Scots ICA has just published its latest views on corporate reporting. It argues for a short report that delivers a clear, concise message about the company past, present and future. This should be based on 12 principles, one of which is: “Report historic cash flow and liquidity information in a way that is meaningful to management and is consistent with the tools used internally to measure performance.”
As well as preparers it seems users in the shape of City analysts are equally concerned about how corporates report cash. According to one corporate governance consultant, equity analysts highlight financial disclosure on cash flow changes as one area where CFOs could do better.
Critical, of course, is what would be better that would work for both investors and CFOs. The good news is that you can find some examples of innovative good practice. For instance, Next plc gave a five-point approach to managing the business, which included how it was looking after the cash. It told the market how much cash it expected to generate in 2012 after capital investment, tax and dividends. Clear, simple, forward looking and above all useful.
And while quoted companies may be slightly protected from the brunt of the recession borne by smaller counterparts, the news that there has been a 24 percent year-on-year increase in the number of companies in ‘critical’ financial distress during the last quarter of 2011 suggests that investor cash is at more risk than ever.
So how cash flows are reported by companies take on additional significance for this reporting season when issues of liquidity management are vital for both corporates and their banks.
When cash flow statements were first introduced into reports and accounts they looked pretty radical compared with their predecessor fund flow statements, which were neither used nor understood.
But two decades later cash flow statements could do with a makeover. CFOs do not use the cash flow statement they prepare for publication as a management tool in the business.
The good news is that there does seem to be growing consensus that improvement is needed. The Financial Reporting Lab - the new and experimental creation of the Financial Reporting Council - said last year that the issue of cash flow statements, among three other cash-related themes, were a hot topic.
The Scots ICA has just published its latest views on corporate reporting. It argues for a short report that delivers a clear, concise message about the company past, present and future. This should be based on 12 principles, one of which is: “Report historic cash flow and liquidity information in a way that is meaningful to management and is consistent with the tools used internally to measure performance.”
As well as preparers it seems users in the shape of City analysts are equally concerned about how corporates report cash. According to one corporate governance consultant, equity analysts highlight financial disclosure on cash flow changes as one area where CFOs could do better.
Critical, of course, is what would be better that would work for both investors and CFOs. The good news is that you can find some examples of innovative good practice. For instance, Next plc gave a five-point approach to managing the business, which included how it was looking after the cash. It told the market how much cash it expected to generate in 2012 after capital investment, tax and dividends. Clear, simple, forward looking and above all useful.
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