Page 52 - Site Visit

3/8/2021

Statement of Cash Flows

 The Statement of Cash Flows is a statement monitoring
the variance between projected and actual income
/ expenses on a recurring basis (usually monthly).
 Difficulties : volatility, unpredictability (esp. with Board Review
Disaster Relief)
 How to:
 Account for cyclical and seasonal fluctuations in  Top executive officers of firms
have final decision rights over
cash inflow / outflow
the budget process.
 Adjustments made when cash inflow less than  Top executives resolve
outflow disputes among lower levels.
 May call for postponing After adoption, the budget is
expenditures/accelerating client billings  an informal set of contracts
 Plan for lags between invoicing/billing for services among the various units of
and actual receipt of cash the firm.
 Chart expenditures according to payment
deadline
 Factor in debt repayments
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Where to Start? Periodic Budget Review
With a Cash Flow
Zero-based Incremental
 Each line in budget is set to zero  Begin with current year’s core  Firms that use annual budgets do not
each year , assuming no program is budget and make incremental create adequate incentives for long-
necessary and no money spent. changes. term planning and responding to new
 Orderly evaluation of all revenues  Assumption is programs and depts. opportunities.
and expenses. are preapproved.  Strategic planning requires long-term
 Motivates managers to eliminate  Only increases and decreases in budgets (2, 5, or 10 years).
inefficient expenses. resources allocated.  Banks often require cash flow projections
 Useful when firm is changing  Review focuses on incremental for the length of any proposed
strategic direction. changes and may ignore borrowing.
 Becomes less useful when same inefficiencies in core budget.  Many firms require managers to prepare
justifications are used each year.  Less focus on rigid calculation both short-term and long-term budgets
 Aim is for quantitative measurability. as part of the periodic budget review.
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Static vs. Flexible Expense Reduction Tips

Static budgets Flexible budgets
 Do not vary with volume.  Adjust for changes in volume.
 Volume changes may create  Evaluate performance after Comparison to Looking within the Looking outside the
budget variances. adjusting for volume effects. /dialogue with similar Organization Organization Office space
organizations
 Since managers are not insulated  Manager is not held responsible for • Employee benefits • Outsourcing options • Fee reduction • Telecommuting
from volume changes, they will try volume changes. • Vendors used • Salary analysis options with current option reduces
to mitigate the impact of adverse •Expense ratios • Ensure authorization vendors office space
volume changes. • Expectation for levels for check •Require multiple bids •Sub-lease
future periods requests on all new opportunities for
• Preventive measures products/services unused space
for fraud above certain • During downturn in
threshold real estate, lock in
• Bring certain space at reduced
functions in-house rates
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