Visual Cash Focus - User Tip 16

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1 Visual Cash Focus - User Tip 16 What are Cash Flow profiles and how do I modify them? Background Cash Focus uses a double entry accounting engine to simultaneously build the profit & loss, balance sheet and cash flow results for any number of profit centers, entities and for all types of organisation s. Cash Flow profiles specify the balance sheet account that the budget or forecast data is to be accrued to and in % terms how the accrual is to be collected or paid and into which bank account. There are of course lots of variations to this depending on the situation. The Cash Flow part of the assumption can be turned off to accrue expenses, amortize a prepayment and to transfer accumulated expenses or revenues to any balance sheet account. Typically the default profiles are set to pay or receive the cash flows 100% the period following and new rules are created for exceptions to this. This practice keeps the number of rules to a minimum whilst incorporating any industry specific methodology into the model. How do Cash Flow Profiles work? During the activation process Cash Focus looks at the data, the timing/accrual ticks and profiles used for each account line and period. A first set of accrual journals create the P&L and Balance Sheet. Then depending on whether there is a timing tick adjacent to the budget amount a second journal reverses the Balance Sheet accrual to the specified bank account. If there is no timing tick the amount is accrued until a tick is found. This double entry process creates the Profit & Loss, Balance Sheet and cash Flows simultaneously guaranteeing that the balance sheet and cash flows are fully reconciled. The objective of Cash Focus is to generate your ledger results in advance following the same methodology used in your ledger system to record your transaction history. Cash Flow profiles detail your organisations transaction methodology so that any actual to budget variances are due to differing levels of activity rather than compromises in the accounting treatment.

2 Suggested Solution How do I create a new Cash Flow Profile Whenever a new account line is created a default cash flow profile and timing marks are assigned to it for each period. Here we see a revenue account Software Sales with the default Sales Profile (the default profiles contain the word Profile ). Right clicking the profile and choosing View/Edit opens the profile Note that Cash Flows can be collected or paid in the same period as the budget period 0 or in advance (period -1, -2 etc) or in arrears (i.e. period 1 and 2 etc).the period and % is relative to the timing tick. The % collection/payment assumption can be split over any number of periods Clicking Show More reveals the balance sheet accrual and bank account. They can be customized to link to any other balance sheet or bank account.

3 Tip - All default profiles should read 100% paid or collected the period following. Only add New profiles when the default rules do not apply. When adding New profiles use the name of the account it relates to as the profile description. This makes reading the cash flow report easy. I.e. All revenues are collected the period following except for (there will be a list of the exceptions). Do the same for expenses. Cash Flow profiles can be split by % over any number of periods. Cash Flows can be collected/paid in advance or arrears. Cash Flow profiles can amortize opening balance sheet balances Cash Flow Profiles can capitalize/transfer a selected group of expenses to any balance sheet account. Each % split can be linked to different balance sheet account. To make a non-cash profile, use a big odd number like period 99 as the period indicator. The 99 stands out on the Cash Flow profile assumption report. Here is an example of software development costs being transferred to a WIP Software Development account on the balance sheet. Note the #99 timing.

4 EXAMPLE Profiles Wages Wages are an exception to the default rule of 100% paid the period following. Here wages are split across three balance sheet accounts including Accrued Expenses, PAYE and Holiday pay. Note the non-cash accrual to the Holiday Pay account. This is a typical payroll assumption where there are no separate lines for ACC, PAYE, Holiday Pay, other deductions etc. FBT Here we see FBT being accrued to the calendar quarter months and then being paid the month following. A new profile FBT was created to accrue the expense to Accrued Expenses. This is different to Accounts Payable in the default expense profile.

5 Where as Bank Interest, Bank Fees and Rent are paid in the same month, create new profiles for each with a timing of zero. ACC Levies ACC levies are % variable on the models 3 Wage accounts. In this example we have assumed that there is only one payment due around August/September of each year. This payment represents a wash up of the previous year s prepayment and a prepayment for the current year. As with most annual payments a single timing tick is placed alongside the year end. This forces Cash Focus to accrue the ACC expense for the 12 periods. The cash flow part of the assumption says period -10. This means pay the total accrued (up to the tick) 10 periods prior to the tick. The result of this set up will be accruals, i.e. Dr ACC Expense, Cr Accrued Expenses 2. Dr Accrued Expenses, Cr Bank 10 periods prior to the accrual tick. On the cash flow report we will see a single payment in period 2. Insurance - Insurance is prepaid 11 months in Advance This is a variation of ACC above. In this example the insurance expense is spread across all the periods it relates to and a single timing tick is against period 12. Instead of using default expense profile, a new assumption is created to accrue the expense to a prepayment account. The effect of the single tick is to accrue a total of $4,800 to the prepayment account in $400 increments. The effect of the timing

6 assumption -11 is to pay the cash flow 11 periods in advance. This creates a debit of $4,800 to the prepayment account. Effectively the prepayment is then amortised by the $400 increments down to zero by period 12. To get the GST correct turn off the Auto GST function (see account properties) and manually enter the amount of GST that can be claimed in the period the advance payment is made. The manual GST column appears when the auto GST calculation is turned off. All Cash Flow Profiles can be printed and reviewed

7 This report is one of the key audit schedules. Click Reports Budget to see this report and many others. Here is how to read the Cash Flow assumption report starting from the top. Revenues All revenues are collected 100% in the period following (because there are no exceptions) Direct Costs All Direct costs are paid 100% the month following except for Developer Rent which is paid in the same period Developer Salaries which are paid 75% in the same period via accrued expenses and 25% PAYE is paid the period following Developer Costs are non-cash (i.e. the #99) and are being accumulated in the balance sheet Software Development Cost account Expenses All expense are paid the month following except for ACC which is paid annually 10 periods in advance Bad Debts are written off in the period recognised ( a provision would use a 99) Audit Fees are paid 20% 6 periods in advance of the year end (i.e. an interim audit) and the balance is paid 2 periods after the year end. Tip Non Cash Expenses, accruals and transfers two steps 1. Remove all the timing ticks 2. Use a new profile with a period reference 99 and change the default A/P to your required balance sheet account Tip Review the Cash Flow report The Cash Flow report is the calculated result of your budget and cash flow assumptions. When reviewing the cash flow reports look for and highlight any items appearing as paid/received the month following that should not be. Look for items that are Non Cash and shouldn t be there. Review the timing ticks and profiles for the highlighted lines.