As the CFO or Director of Finance, cash should be the most basic and regularly reported balance to your stakeholders—arming them to make decisions for change, or to stay the course. And, about cash, what do you know? Specifically, collections, and cash burn? Live broadcast of these metrics gives stakeholders the ability to assess both short-term financial health (position of liquidity), and your ability to meet long-term needs (position of solvency).
We start with these definitions of collections and burn, and include other measures of cash to reliably check our figures. Reporting all of these, each period, will help cash stick in the mind of stakeholders.
- Cash (beginning and ending period)—All sources, unreserved, and readily available.
- Cash collections—All cash inflows provided by operations.
- Cash burn—All cash for meeting operating, investing, and financing needs (other than cash received/used for debt or equity financing).
- Net operating cash—A more narrow measure of net cash inflow or outflow (a check figure for our purposes, as seen on your statement of cash flow).
Statements of cash flow provide net operating cash, and other cash flows from financing and investing activities, but they fail to provide separate measures of collections and burn; cash metrics that make it easier for management to gauge if the company is meeting, or exceeding, its weekly or monthly nut.
How to calculate cash collections and cash burn
To calculate cash collections, we recommend using a series of general ledger account balances (both increases and decreases for the period). Then, we’ll back into cash burn. We’ve found that other methods of calculation, including simply filtering on decreases to accounts receivable as a proxy of collections is flawed due to events like reversals (unapplying receipts to outstanding receivables).
Likewise, other liability accounts like deposits and/or unearned revenue must be taken into account and sometimes don’t post to the customer ledger in the same way. By keeping the calculation at the highest level of the system—the general ledger—and accounting for both increases and decreases, we ensure capturing all net activity. Note: cash burn excludes sources and repayments from debt and/or equity to reflect only cash used for operations, investing, and payment of dividends and/or interest. Amounts from the statement of cash flow can later be used to check the calculations and determine if our net cash inflow (outflow) is correct. We start with these summary calculations:
Having established the account balances we use to derive collections and sources (repayments) of financing, we move to a proof:
Creating checks as seen above will help to build confidence in your numbers and ensure that you haven’t missed including GL accounts that are required for determining cash collections and cash burn. We recommend building-up to depending on the numbers as displayed on a dashboard (see below).
How to systematize your calculations
For the exercise to be relevant, cash metrics should be viewed from the top reporting layer of your ERP or enterprise accounting software system, ideally from a financial dashboard. Only here can common cash metrics be visualized expediently, and without error or requirement to “refresh.” Keep the numbers rolling with trailing period reference, and in the context of other scorecard amounts to provide references to sources and uses of cash. Cloud financial management systems provide the best option for live metrics reporting, as the dynamic nature of the system, and their underlying capabilities to perform calculations are fit for the task. Here’s a snapshot of how to capture live cash metrics on a dashboard:
What do I do with it?
As you bring cash metrics live and ensure your executives get default navigation to dashboards for their review, they will begin to formulate an understanding of your ongoing financial position and results. In summary, keep stakeholders up on collections and burn over related periods so that short and long-term changes can be made. And, keep the numbers rolling. From here, further detail and changes to operations, investing, and financing can be made.
A version of this post originally appeared on the The NDH Group, Ltd. blog here.