Cash Flow is the cash that a company generates in a certain period of time. The sources of the cash flow are four:
- Cash from Operations
- Cash from Working Capital
- Cash from Investments
- Cash from Financing
Alejo Lopez Casao |
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CASH FLOW:
Cash Flow is the cash that a company generates in a certain period of time. The sources of the cash flow are four:
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Do you really know your customer? Sure it happened to you..." the (loan) application is being analyzed by the risk department" or " the risk analyst is looking at your case right now.." and you get an image of a bunch of (freaky) people crunching numbers and statistical data in their laptops without even knowing the name of your company or what do you do... or what do you want the money for...
The DSO is the KPI for the management of accounts receivable but it is not always easy to understand and to interpret. What is really the DSO?
The DSO is certainly the most widely used indicator in credit management in all countries of the world. It is a major challenge because of its key role in evaluating business performance and its effect on the working capital requirement (WCR). However, it is not easy to grasp. It is the subject of discussions the more passionate and discordant that the speakers are experts in credit management. Interpretation of the results of the Days Sales Outstanding sometimes down to almost insoluble oware. Moreover, what is the DSO? What are the different methods of calculation? How to improve it? A not so obvious definition Many people think that the DSO is the average payment period of customers, probably because it is an easy explanation to give and to understand. This is false. Indeed, it is calculated with open receivables, that is to say invoices not yet paid by customers. How can we deduce an average delay of payment then? If it is in part the payment terms granted to customers, it is simply the number of days of sales* recognized and not yet paid. *the recognition of revenue is not necessarily linked to the billing but in some cases to the advancement of costs (IFRS rules on projects management). From an accounting point of view, it is called the receivable rotation period. Like any current asset, the accounts receivables are transitory accounts. An item (invoice...) created in one of these accounts is not expected to persist but to be cleared after a reasonable time. Otherwise, a doubt arises regarding the collectability of the debt with as a consequence the need to take a provision. A DSO drift may therefore lead to a decrease of the company's results in addition to an increase of the working capital requirement. Several calculation methods which do not facilitate its interpretation It is possible to identify two main calculation methods: the balance sheet method and the roll back method of exhaustion of the receivables by the sales. There are in addition a multitude of variances on data considered by companies to calculate it. The same method applied in two different companies give different results just because the first one deduct the provisions for bad debts or provisions made for credits to be issued (trade discounts, year-end bonuses ... etc.) from the receivable, which directly influences the result. In addition, two calculation methods produce different results because they do not have the same sensitivity to the monthly changes in turnover. It is therefore risky to compare the DSO of several companies. To do this we would need to analyze in detail the calculation methods for often find that they differ. How to interpret the results Many credit managers regularly ask themselves one of these questions:
For example, the balance sheet method calculated over 3 months of turnover is very responsive to sales changes. A big month of turnover just realized improves the indicator but will deteriorate in a few months, when it comes out of the calculation when all the debt it has generated has not yet been cleared. The explanation of the result goes through the analysis of changes in receivable positions: not due invoices and overdue items, credit notes issued, payments received, provisions...etc. This has to be analysed dynamically with the change of the turnover. Indeed, the DSO may vary in the opposite direction of the evolution of the receivable if the turnover has varied in the same direction but more. For example, if the receivable has fallen by 50 000 but the turnover last month decreased by 80 000, the DSO will increase. To better understand the DSO, it is necessary to decline it into parts, for example by current DSO (corresponding to unmatured invoices) and DSO overdue (resulting from the delay of payment of invoices). It is possible to split it for each type of data that are present in the accounts receivable. https://www.evernote.com/shard/s8/sh/bdbacbe6-46af-4fb8-beb9-8be8055b46f1/e4142f5823d9c698fb86abb27d361a70 This breakdown allows to better understand the results and explain the reasons of the changes of the indicator. In this example, we see that the indicator is deteriorating because of the rise of late payments except for the last figure when overdue started to decrease. The other advantage is to clearly identify whether the indicator improves for good or bad reasons. For example, if the receivable related to doubtful accounts are deducted from the receivable amount used for calculation , the result will be better in case of new provision due to bankruptcy of a customer, which is not satisfactory. How to improve it? The best ways to sustainably improve the DSO are simpler than its daily interpretation. This is to get better payment terms with its customers and to apply them:
Conclusion The DSO is an imperfect indicator of performance. It can be coupled with other indicators (overdue rate, unpaid rate ... etc.) to evaluate the performance of a business in accounts receivable management. With a volatile nature, it must be interpreted on an average of at least several months and do not get excited or tense because of a sudden change. However, it is essential that it is calculated and followed whatever is the size of the company because it allows to quickly identify a drift of customers' payment behavior and / or of payment terms granted to them. It is also the main component of working capital requirement, and therefore deserves all the attention of business leaders and managers. How to choose, and be the best CRO possible
by Mark Adams, Business Insurance - April 27, 2009 As published in the April 27, 2009 issue of Business Insurance Experience and abilities are the hallmarks of the most effective chief risk officers, says Mark Adams, co-leader of the Insurance Practice in the Americas and area manager of the Boston office at global executive search and assessment firm Russell Reynolds Associates Inc. He says businesses need a clearly defined framework to choose the right CRO and describes qualities that set candidates for that post apart. It is important that the professional lender remains objective, avoiding the temptation to become emotionally commited to other than providing a service. The borrower may well have been planning the project over a long period and expects an inmediate answer... however, the lender must take the time necessary to reach a lending decission, it is not in the interest of either party to get it wrong... The deccission must been taken following certain principles and structure:
Take a look at the diagram for more on this process. Lindorff has recently published their European Outlook for 2015, brief and worthy to read:
Organización del departamento de riesgos y la figura del credit manager
En su consulta vinculante V2426-14, de 15/09/2014, la DGT se remite al criterio de la Comisión Europea, que acepta, como facturas electrónicas a efectos de la Directiva sobre el IVA, entre otras, las facturas en forma de mensajes estructurados (p. ej. XML) u otros tipos de formatos electrónicos (como mensaje de correo electrónico con archivo PDF anexo) o un Fax en formato electrónico (no en formato papel), siempre y cuando se pueda garantizar la autenticidad de su origen, la integridad de su contenido y su legibilidad.El IASB parece haberse decidido por un modelo único para los arrendamientos. Es decir, el arrendatario contabilizará todos los arrendamientos como arrendamientos financieros (arrendamientos de tipo A). El resultado es un activo y un pasivo en el balance y, lo que es más importante, un gasto concentrado al comienzo del período.
El modelo es similar a la propuesta original del IASB en 2009, pero el feedback fue menos que positivo. Desde entonces, el IASB ha tomado una dirección diferente, ha buscado la convergencia con el FASB y está de vuelta donde empezó. Esta vez, parece decidido a mantener la línea. El Vicepresidente del IASB, Ian Mackintosh, dijo en junio de este año que “en los sectores económicos que se ven afectados de manera significativa por la norma sobre arrendamientos, aporta una visión muy necesaria en el verdadero apalancamiento de las empresas”¹ Otra gran ventaja de un modelo único es que no hay arbitrariedad. Todos los arrendamientos se tratarán de la misma manera – parece aceptable y conceptualmente sólido. Entonces, ¿por qué hay tantos críticos? La razón principal es que resulta en un gasto concentrado al principio del período cuando muchos piensan que lineal refleja mejor la sustancia económica (por ejemplo, arrendamientos de inmuebles). Muchos siguen apoyando el modelo del FASB, que es parecido al de NIC 17. Aunque el mundo finalmente parece dispuesto a aceptar el reconocimiento de los arrendamientos en el balance y el gasto concentrado al principio del período, persisten los retos – especialmente para las grandes carteras de arrendamientos relativamente pequeños. El IASB tendrá que resolver algunas de las cuestiones prácticas si piensa seguir adelante con un modelo único. De lo contrario, todavía hay posibilidades de amotinamiento. Los rumores actuales indican que es poco probable que el EFRAG apoye la adopción por la UE sin más debate. La primera de estas cuestiones es cómo distinguir entre un servicio y un arrendamiento. La contabilización de los arrendamientos operativos es casi idéntica a la contabilización de los contratos de servicio conforme a la práctica actual, por lo que la línea divisoria nunca ha sido debidamente examinada. Muchos acuerdos tienen elementos tanto de un servicio como de un arrendamiento; cómo debería reflejarse eso en el modelo contable está abierto a debate. El IASB también sigue discutiendo los arrendamientos de “pequeña envergadura”. Su intención siempre ha sido que las entidades no deberían registrar dichos arrendamientos en el balance. Los beneficios de proporcionar esta información no compensan los costes. La forma y el alcance de la exención serán difíciles de trabajar. Por último, la cuestión de la transición y la fecha de vigencia siguen sin resolver. La dirección ya está pasando por un proceso de examinar los contratos en relación con la nueva norma de ingresos ordinarios. Las disposiciones transitorias de cualquier guía nueva podrían implicar que la dirección tenga que repetir ese proceso de nuevo unos años más tarde. Esto podría conducir al apoyo de un enfoque prospectivo a la transición. El plan de trabajo del IASB indica que se espera finalizar las nuevas deliberaciones a finales de año, con una norma presumiblemente en el transcurso de 2015. Esto parece ambicioso, pero el IASB parece decidido a completar este proyecto. Written by Andy Thompson
The accounting rules for sale and leaseback (S&LB) transactions were the main issue considered in the latest round of re-deliberations of the proposed new global lease accounting standard after last year's second exposure draft (ED2). The joint standard setting bodies – the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) – failed to reach agreement on a few of the issues involved and will be returning to them later. However, it is already clear that the S&LB rules will be extensive; and in the case of international financial reporting standards (IFRS) they will be more complex than current rules. Even though all leases will generally be going on-balance-sheet to the lessee under the new rules, the standard setters seem to feel that S&LB transactions could still be structured to obtain undue accounting advantages in the absence of special rules. Recognizing a sale The main issue concerns the conditions for both parties to recognize a sale and a return lease. Where a sale is not recognized, the alternative accounting treatment is for the S&LB transaction to be treated as a refinancing of the underlying asset. Under existing rules there are no restrictions on recognizing a sale, except for some real estate leases in US GAAP. As proposed in ED2, the Boards confirmed that the S&LB sale recognition rules will be mainly aligned with the general rules for recognizing sales of assets in the separate converged accounting standard for revenue recognition (Rev Rec). That standard has now been finalized and issued as IFRS 15, or Topic 606 in US GAAP. There will be only a few additional “override” criteria specific to S&LBs in the leasing standard. The Rev Rec standard has a number of sale recognition criteria relevant to S&LB transactions. Each factor could count one way or the other; and none on its own would be conclusive. It would seem that three of the Rev Rec criteria as follows would operate in favour of recognizing a sale: • The buyer/lessor takes legal title to the asset; • The seller/lessee has a “present right to payment” for the transfer; and • The buyer/lessor has “accepted” the transfer of the asset. On the other hand one other Rev Rec criterion – the fact that the seller/lessee retains possession of the asset – would always count against sale recognition. The final criterion would be that of whether the buyer/lessor has assumed “significant risks and rewards of ownership of the asset”. This would of course depend on the extent of any unguaranteed residual value (RV) in the return lease. The Boards' staff report before the latest meeting acknowledged that simply cross-referring to the Rev Rec standard would mean that “in some circumstances there will be significant judgement in determining whether a sale has occurred” in typical S&LB structures. However, Board members were divided as to whether application guidance should be given in the leasing standard. The IASB initially voted by a large majority against providing application guidance. However, some FASB members felt that guidance could be useful. FASB eventually decided to leave its decision on this until after receiving a further staff report on aspects of possible “override” conditions. FASB's re-deliberation of these issues will be done at a joint meeting of the Boards. It is therefore possible, though it does not seem likely, that the IASB could then reconsider its decision not to provide application guidance in the IFRS version of the standard. There was a further non-convergent decision on the “override” criteria, resulting from the earlier divergent decisions as to whether to retain lease classification (for profit and loss account expensing purposes) in lessee accounting. FASB decided that in US GAAP there will be no recognition of a sale in S&LBs where the lease is classified as “Type A” (i.e. a capital or finance lease under current rules). The IASB will have no corresponding override based on lease type. Other S&LB issues The Boards considered several aspects of the S&LB accounting rules in cases where the sale is recognized. The major one of these concerned whether any gain or loss compared with the initial carrying value of the underlying asset should be recognized up-front by the seller/lessee. In ED2, given the proposal to change current practice by precluding sale recognition in some cases, no restriction was proposed on the up-front recognition of gains on the sale, where the sale itself could be recognized. However, the IASB has now adopted a more restrictive and complex rule on this aspect compared with the ED2 proposal; and here again the two Boards have adopted non-convergent solutions. FASB decided that in the US GAAP version, there should be no deferral of gains (or losses) realized on the sale value under Type B (i.e. operating lease) deals. For IFRS the IASB agreed that while any losses on the sale would be recognized up-front, any gains would be subject to a partial deferral formula. For this purpose, where the sale price giving rise to a gain is at a fair market value, the lessee under IFRS would first measure the PV of the lease payments as a proportion of the sale price. That proportion of the gain would be deferred; while the remainder (based on the RV as proportion of the sale price) would be recognized up front. The valuation of the lessee's “right of use” (ROU) asset would then be based on the PV of the lease payments less the deferred part of the gain. Both Boards agreed that where a sale is recognized, both parties should account for the return lease in accordance with the normal lessee and lessor accounting rules. The Boards agreed to defer their consideration of the detailed accounting rules for cases where a sale is not recognized, until after the further requested staff report is received. The staff report had contained recommended transition rules for applying the new S&LB requirements to return lease contracts running at the date when reporting entities first have to apply the new standard. However, the Boards decided to defer consideration of this until they decide the general transition rules for all leases, towards the end of the re-deliberation process. Lessor disclosure rules The other issue re-deliberated this time concerned the disclosure rules for lessors in the notes to their accounts. Most of these rules were agreed on the same lines as the ED2 proposals. There were some changes reflecting the subsequent decision to retain the main current lessor accounting models, rather than moving to a new lease classification line as proposed in ED2. The agreed rules will include several specified tabulations, with breakdowns between Type A and Type B leases, covering lease income and a maturity analysis of undiscounted future cash flows; asset class breakdowns of Type B leases (where the underlying asset, rather than receivables and RVs, will appear on the lessor's balance sheet); and narrative disclosures on such aspects as RV risk management. The IASB decided to drop a proposed ED2 disclosure that would have required a roll-forward reconciliation of opening and closing balances of Type A lease receivables and RVs. Instead it agreed a requirement to explain significant changes in the outstanding balance of the lessor's net investment in these leases (or in their receivables and RV components if these amounts are presented separately on the balance sheet) in the latest reporting period. However, FASB has a separate current project on accounting for the credit impairment of financial instruments, which would include impairment of lessors' Type A lease portfolios. It therefore decided to defer consideration of a possible roll-forward disclosure for Type A receivables (which is not required at present in either US GAAP or IFRS) until it reaches the relevant stage of this impairment project. FASB nevertheless concurred with the IASB requirement for an explanation of changes, without a roll-forward reconciliation, in respect of RVs. Some remaining issues It now seems likely that the new lease accounting standard will be finalized in the foreseeable future, perhaps early next year. Possible longer delays from difficulties not yet anticipated by the Boards can nevertheless not be ruled out on past form; and some significant issues remain to be re-deliberated. Apart from the deferred decisions on S&LB, the major remaining issues will be: • possible exemptions from the lessee capitalization rule for small ticket assets; • the disclosure rules for lessees; • the transition rules for leases running at the adoption dates; and • the general effective date of the new standard. The further report on small ticket exemptions was called for when the Boards first considered this in March, but has been long delayed. It is now expected in September |
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