Effective Accounting Techniques for Managing Cash Flow Variations
What Makeup Accounting Techniques Could Be Used to Handle LEFE Society?
While the result may be distorted by defective income and expenditure, for example, by increasing or decreasing amortization, impairment losses, etc., the defective flow generated by a company’s magnitude is totally objective. This is as much about recognition as it is about the assessment elements that make up the defective flow. Invoicing and payments are unrelated to the effects induced by the different accounting policies used by the company for the same transactions and economic events (accounting principles of the company do not affect LEFE), which cannot be manipulated.
Analysis of Financial Positions
Depending on these data, we can determine which of the three companies presented a more balanced financial position.
Company A
Starting from €5,000, the company has been able to generate cash from operations more than double the results, thanks to the positive effects of adjustments (e.g., depreciation). This indicates improved management of capital flow, providing cash to the entity: reduced cash outflows and extended payment deadlines. Of the total cash flows generated by operating activities, the company has assigned all to new investments, likely made with the intention to increase or maintain the capacity to generate future cash and finance (debt repayment), which has resulted in a negative net balance of -€2,500 (cash consumption). If we isolate an exercise where the company is investing excess liquidity in new investments and debt cancellation, the company need not present problems of liquidity in the short or long term. If it can continue to maintain this level of cash generation, there is no need for concern.
Company B
Based on the same previous results, the company has only been able to generate cash from operating activities of €2,000. In this case, the current management of its capital has worsened, resulting in a cash deferral of €5,000, with the obtained result. We observe that there was a perfect balance between operating activities, investment, and financing. All resources generated by operating activities were aimed at new investments and paying their financial debts, resulting in no net variation in treasury.
Company C
Despite an increase of €2,400, this company is in a more unfavorable situation. We are facing a company that, despite being able to generate profits (positive result), has been unable to generate cash flow from operating activities. To cover the deficit caused by these activities, it has had to resort to selling current assets and has been funding.
Inclusion of Operations in LEFE
- Units of credit in €6,300 for mobile not part of LEFE. This does not affect the company because funds have not been paid, and therefore it will not be reflected in LEFE for the exercise or years in which the payment occurs.
- Payment of interest earned in 2007 of €1,280 is part of LEFE, involving a payment out of funds from the company, although the accrual was made in the exercise of 2008.
- Loan amortization received in 2005 of €12,000 is part of LEFE, implying a departure from funds produced by funding.
- Capital increase under reservations made in 2009 for a total of €30,000 will not be part of LEFE since it does not result in any entry of funds.
- Payment in 2009 of €4,500 relating to machinery acquired in 2007 is part of LEFE as it represents an entry of funds from divestment, although this was produced in 2007.
- Sale of land in 2009 for €60,000 will not be part of LEFE until it is completed, i.e., until 2010.