Digitalisation is tidying things up: although the indirect method of cash flow determination is still used as "state of the art" in most companies, it is no longer up to date.
But what are the differences between the indirect and direct methods and what are the possible advantages or disadvantages? Before we answer this question, let's take a brief look at the contents of the cash flow statement.
The cash flow statement shows where cash inflows and outflows come from, what they are used for and how cash and cash equivalents develop.
We differentiate the cash flows into three areas:
We differentiate into the area of operations, the area of investments and the area of financing activities.
This information provides insight into the financial position of the company, its (future) liquidity and its financing through equity or debt.
Not only are these insights of interest to investors, but management can also use this liquidity-critical information to react to opportunities and risks at short notice, provided the information is available promptly - i.e. as up-to-date as possible.
There are, as I said, two possibilities: the indirect and the direct method.
With the indirect method for determining cash flow, which is no longer up-to-date but is widely used, the items affecting or not affecting liquidity have to be determined retrogradely with a lot of manual effort for the annual financial statement.
To determine the cash flow statement according to the indirect method, accounting data is used almost exclusively.
Historically, however, it has not been the objective of accounting to provide information on the liquidity situation and financial strength of a company. Thus, the data are not available in the desired form and obtaining this information at the end of the period is correspondingly costly.
This contrasts with the direct method. However, the direct method requires a data and information structure that accounting cannot provide in this form either without considerable manual effort. The "cash effect", i.e. the liquidity effect, would have to be identified, analysed and "written down" from every booking, from every business transaction.
In simplified terms, this looks as follows:
However, in addition to the actual analysis, some additional things have to be observed, such as the issue of value-added tax: the value-added tax included in the receivables is "cash" at first glance, but it becomes a liability to the tax office. Thus the "cash effect" is zero. The same applies - of course with the opposite sign - to the input tax included in the liabilities.
The areas of "financing activities" and also "investment activities" have already had to be published for some time as part of the annual financial statement according to the direct method. This is a predictable handicap for companies to also present the area of "operating activities" according to the direct method in the future.
However, the derivation of the cash flow statement in this direct way is not feasible for companies due to the large number of business transactions and the associated manual effort.
The solution: The module "Cash Flow Accounting" automatically shows the current financial position of the company according to the direct method.
The module is an integrated, but at the same time completely encapsulated part of the SAP system and in turn consists of the two applications "liquidity calculation" and "liquidity planning".
By means of the liquidity calculation, each entry is broken down into cash and non-cash items.
The liquidity statement also shows the source and application of funds on the basis of actual figures. The calculations are made on a daily basis, but do not influence day-to-day business and provide the desired information at the push of a button, i.e. cash flow statement realtime.
Liquidity planning is based on the same master data structure. Three data sets with planned figures - instead of the actual figures - run into the rolling planning calculations and show how the planned liquidity situation of the company will develop in the future.
