Some years ago, I found an alternative way of presenting a balance sheet, which shows some interesting advantages to the classical way. This led us to apply it to the company I was working for and had a positive impact for the managers to interpret figures and relating them in a more direct way.
The question behind this format is “What makes more sense to the leaders and managers and helps them to understand the figures in a better way? What helps them to see the figures in relation to where they can influence them?”
There are traditionally three basic documents:
- Profit and Loss Statement, the
- Balance Sheet and the
- Cash Flow.
These three are inter-related. The most commonly used is the Profit and Loss Statement, which is built up by three parts: 1 – Operational Result, 2 – Financial Result and 3 – Non Operational Results. The next example makes this clear:
The colours show the specific responsibility of the business manager (green) and the financial manager (blue).
In order to come to Operational Result, the manager works with Operational Assets and Liabilities, like stock, receivables (clients), payables (suppliers), which he can influence by purchasing more or less, negotiating more credit from the supplier, keeping more or less material in stock, giving more or less credit to the clients. In doing so, he influences directly the cash flow of the company. So, it is important to have an instrument that shows this influence, so that he can be held responsible for his part in the cash flow.
This means that also the Balance Sheet and the Cash Flow have to show where the manager is responsible and where he can influence. This brings us to a format in which the distinction is made between items where the operational manager influences and where not.
First I will present the traditional Balance Sheet, in which the green colours show the operational accounts (yellow/green) that can be influenced by the operational manager, the financial accounts (blue) and “other accounts” (orange).
BALANCE SHEET (traditional)
Now I will arrange the accounts in a way the operational accounts (yellow/green) are put together. Comparing the values with the previous year, this immediately shows the variations of the accounts (part 1), that are important for building the cash flow also in such a way that we can see how the operational activity is generating cash or demanding cash, resulting in investments (or disinvestments) of operational working capital.
Also, the net investment made in operational assets (part 2) are already visible in the Balance Sheet.
The further accounts (blue) show the Financial Accounts and their variation.
See the following alternative Balance Sheet:
BALANCE SHEET (alternative)
In part 3 the Balance Sheet gives the view of the Financial Assets minus Financial Liabilities. These figures are a result of the financial management, where an operational manager normally has little influence, unless in moments when he is taking part in a Direction Team.
These start with the Financial Liabilities (short term and long term) minus financial receivables and finally Cash and Financial Investments.
Part 4 of the Balance Sheet show the Assets and Liabilities that are not related to the business of the organization, and are also not Financial Assets. Normally this part has few items and does not bring a big change to the sum of the first and second part.
Now we come to the 3rd document, the Cash Flow, which can be built in three phases:
1 – Showing the net cash provided by Operating activities (or used in, if there is a loss). In practice this is the Operating result plus the costs that do not affect cash, mainly the depreciation.
2 – Showing the cash used in Investing activities. The investments here are in Working Capital and in Fixed Assets.
3 – Showing the cash generated by or used in the Financial activities: new loans minus payment of debts.
The final result corresponds to the variation of the Cash.
Here is a concrete example.
Holambra, 27th November 2018