• An independent cash report (ICR) can be produced to identify whether the organisation is clearly and concisely reporting its cash flow objectives under the mandatory requirement of Companies Act 2006 (as amended Oct 2013) for a Strategic Report and Directors Report.

    The ICR is produced through robust and detailed analysis undertaken by reference to not just the annual report but also all other communications whether they be to investors /shareholders/financial institutions  via interim management statements, employees via pension fund reports, newsletters or indeed to customers and suppliers.

    Narrative, commentary or even recognisable graphs of trend data need consistency and robust reviews to deliver the strategic objective of the organisation in cash terms.

    If one is informing employees/pension fund members of the strategic objective then recognisable graphs of trend data may provide clear communication throughout the organisation of what is required.

    However communication of the same objective to investors/shareholders/financial institutions could require review of the financial impact of certain strategic objectives on the organisations credit worthiness.

    Customers and suppliers, attempting to understand the self-same strategic objective, maybe interested in the impact on contractual terms.

    Why Working Capital Metrics are calculated differently by credit rating agencies and organisations alike.

    Q1 of any new year sees a huge volume of organisations publish their annual reports. The narrative normally eludes to various cash metrics and in particular to working capital.

    However when one reads through these reports to establish a common but significant KPI like DSO, DPO or even DIO, they are not often found and instead other forms of cash metric are used but rarely explained as to why an alternative measure is being used, its relevance to the business its impact – maybe on bonus, maybe on remuneration or maybe on investment decisions.

    The likes of Marston Plc. suggest CROCCE, ITV profit to cash and Nestlé FCCF and yet none are ‘recognised’ by the usual credit agencies.

    Furthermore the agencies then compute DSO, DPO and DIO that does not conform to the usual accounting scenarios and rarely give a reason as to why?

    So when attempting to understand the cash conversion cycle or any working capital metrics one has to be very careful. As providers of such information we establish with the management team how to measure the real changes in working capital through the use of Performance Indicators (PIs) that are a subset of financial KPIs and are owned, measured, monitored and managed by operations.


    The Strategic Report required under the 2006 Companies Act as amended in October 2013 specifically states in Paragraph 12 that in the case of a quoted company ‘where appropriate, include references to, and additional explanations of, amounts included in the company’s accounts’

    Narrative within the Management accounts could contain views from ‘senior managers’ – defined in the aforesaid Act as being a person who-

    a)     Has responsibility for planning, directing or controlling the activities of the company, or a strategically significant part of the company, and

    b)     Is an employee of the company.

    By reviewing management comments, directors should be able to identify KPI’s/KRI’s that they then can provide as evidence to support the Strategic Report , but, with their own narrative, so that per section 14 of the Act ‘disclosure would, in the opinion of the directors, be seriously prejudicial to the interests of the company.’

    The critical piece in our view is the ability to measure the performance of the organisation, based on Paragraph 5 of the Act, ‘effectively’ which means reviewing trends and strategies to improve performance and delivering action plans that address the cash impact on the organisation.


    Monthly or at least quarterly management accounts are more current that interim management statements (IMS) and statutory accounts which should provide management accountants with an ‘edge’ over their peers.

    Frequency of reporting has increased exposure and therefore pressure on CFO’s and the whole executive team to the point that narrative is somewhat lacking in depth and breadth as it seems many IMS are attempting to ‘hide any surprises.’

    We see on a regular basis reports via social media, analyst opinions, newspapers, disclosures under the Freedom of Information Act and various other media ‘interventions’, that organisations have been ‘found wanting’ when it comes identifying trends in their levels of performance.

    This can immediately be reflected in share prices falling or rising, enquiries being announced, Parliamentary panels being established, various commissions established or indeed the decision for certain key personnel like CEO/CFO to be suspended or ‘let go.’

    The purpose of management accounts, in part, is to reflect KPI’s/KRI’s and various other metrics that support action plans in accordance with how strategy is being implemented.

    The greatest threat to the strategy is normally reflected in cash terms in that once a ‘surprise’- good or bad- is highlighted one should already have reviewed an action plan that puts some cash measures on the impact which could include appreciating what the future impact might be on ‘external’ measures like the market effect on share price or maybe on how the public might reflect on a particular service, a particular political approach etc.

    The Strategic Report required under the 2006 CompaniesAct as amended in October 2013 specifically states in Paragraph 12 that in the case of a quoted company ‘where appropriate, include references to, and additional explanations of, amounts included in the company’s accounts.

    This blog will be developed further to appreciate the affect this will have on Management Accounts.

    Customers and suppliers alike whether they be credit controllers, purchase/ sales managers or financial directors will request a review of management accounts on a regular basis. Why?

    A retained or prospective customer/supplier will want to ensure that their suppliers/customers are a ‘going concern’ at any point in time whether it be placing a new or revised contract, understanding an existing situation regarding a contract or in fact if there is a dispute in the offing whether it be with an invoice, goods/services received or in fact a matter to do with future business.

    The management accounts should not only provide a detailed analysis of how cash is being managed whether it be through DSO, DPO, DIO which are lagging indicators but also the key performance indicators (KPI) and key risk indicators(KRI) that are being measured and monitored by the organisation to manage the DSO, DPO and DIO results.

    Furthermore the management accounts should reflect narrative concerning any changes in financing and strategies being reviewed with regard to contractual terms with both customers and suppliers. Any capex, research and development or significant ‘extraordinary’ outflows of cash re statutory fines, contractual penalties etc. should be risk assessed regarding probability and the cash consequences estimated.

    Why are the management accounts reviewed regularly by lending institutions, credit instititions and investors?

    • Management accounts, although unaudited, can deliver detail behind the numbers that allows credit and lending institutions to understand areas like DSO, DPO, DIO which traditionally, as lagging indicators, do not reflect the current trends in cash management.
    • Such detail can include revenues by business segment, costs associated with problematic contracts and even future references to the way cash might be invested regarding M & A activities.
    • Lending institutions are likely to contact senior management to establish certain aspects that they require clarification on and management accounts can support the decision making criteria that affects the way cash flow could be affected either negatively or positively.
    • Timing is critical in scheduling the publication of information that is required for statutory purposes and management accounts can ‘create’ a level of expectation that means a ‘no surprise’ culture can be established in time for public/statutory disclosures.