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Overview

In order to correctly forecast cash flow, you must separate cash from non-cash transactions in your GL accounts. When these transactions share the same accounts, it becomes difficult to create a cash flow statement that automatically captures cash movements.

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Basics

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The cash flow statement

In most models, actuals are pulled into the P&L and balance sheet by mapping GL accounts. The cash flow statement is then derived using the indirect method:

  • Cash from operations starts with net income, then adjusts for non-cash P&L items and working capital changes.
  • Cash from investing reflects actual cash flows related to asset purchases and sales.
  • Cash from financing includes cash events like loan repayments or dividends.

The key distinction:

  • Operations → subtract non-cash P&L items
  • Investing/Financing → include only real cash transactions

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Common pitfall: cash and non-cash bundled together

In many ERPs, cash and non-cash entries are recorded in the same accounts, making it difficult for cash flow statement logic to distinguish between them automatically. Examples of non-cash items are:

  • Income from subsidiaries (equity pickup) increases net income - but is non-cash.
  • Investment in subsidiaries may include both cash acquisitions and non-cash markups.
  • Fixed asset accounts may record both purchases (cash) and depreciation (non-cash).
  • Equity accounts can include dividend payments (cash) and retained earnings (non-cash).
  • Deferred tax movements affect the P&L and balance sheet but involve no cash.
  • Capitalized salaries represent real cash outflows – but the reclassification is non-cash.

Some CoA templates help by splitting out “asset additions” from “depreciation.” But to fully automate the cash flow, this kind of structure needs to exist wherever cash and non-cash are mixed.

In some cases, both sides of a non-cash transaction flow into the cash flow model and cancel each other out, producing a seemingly correct net cash flow, but for the wrong reasons.

Including non-cash items in the cash flow statement becomes a problem when consolidating, eliminating, or forecasting, becaus they create phantom cash effects that are complex to troubleshoot.

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How to structure your chart of account

Use separate accounts or dimensions in your ERP to distinguish cash and non-cash activity.

Examples:

  • Separate dividends paid (cash) from retained earnings (non-cash).
  • Separate asset additions from accumulated depreciation.
  • Separate income from subsidiaries from other P&L income.
  • Separate non-cash revaluations under investments from actual cash movements.
  • Track capitalized salaries in a way that the original cash outflow is preserved.

If needed, you can periodically “clear” or reclass accounts, with manual adjustments handled in Francis.