Cash Flow Conversion

This document explains how budget expenses and revenues posted on income or costs accounts are converted to payments or payments received allocated in time. You use these converted values in a cash flow budget for reviewing the expected cash flow.

Outcome

Selected expenses and revenues in a profit and loss budget are converted and allocated to specific periods and days.

Converted budget values are posted according to user-defined accounting strings and saved in the following files: the basic budget definition file (FBUDEF), the file for budget details per period (FBUDET), and the file for budget entry per day/detail (FBUDAY).

Use the converted values to create and update a cash flow budget – a balance budget – in 'Cash Flow Budget. Open' (CFS100).

Before You Start

Purpose

The purpose of cash flow conversion is to display budgeted incomes and costs as future payments and payments received. This in order to predict an entity's cashes at a certain time in the future.

When

The conversion is performed each time you wish to create a new cash flow budget, that is, it is not a continuous process. When to create a cash flow budget is decided based on the entity's cash flow management routines and financial situation. An entity with solvency problems or a highly fluctuating cash flow balance is likely to make cash flow budgets more often, in order to control the situation and take required actions.

How

The conversion consists of three stages:

  1. Budget revenues and expenses are converted

  2. Values are allocated in time

  3. The cash flow budget is updated with the converted values.

Stage 1: Budget revenues and expenses are converted

Revenues and expenses in the selected profit and loss budget are converted to payments or payments received. The conversion is based on an accounting table defined in 'Conversion Table. Open' (CFS010).

Which Values Are Converted?

Which values to convert depends on the purpose of the cash flow budget. If you intend to use the budget as input for the expected payment lines in a cash flow plan, you only include revenues and expenses that are not registered in the sub-ledgers. (Totals for these values are automatically retrieved in separate lines in the cash flow plan.)

Examples of values to convert when creating a cash flow budget for short-term planning are:

However, if you wish to use the cash flow budget independently to review the long-term expected cash flow (for example, for all periods in the budget year), a more substantial part of the sub-ledger must be converted.

Note: Only the posted values on income or cost accounts that need to be converted. Long-term changes in assets or liabilities can be included in a cash flow budget without former conversion.

Examples of values to convert when creating a cash flow budget for long-term planning are:

How an Accounts Conversion Table Functions

Basically, the table consists of one or several lines. Each line represents a range of accounting strings in the profit and loss budget. Up to 999 lines can be defined to make sure that all relevant accounts are included in the account conversion.

The totals of budget transactions on these accounting string ranges are all posted on one specific target accounting string. This accounting string is then used in the cash flow budget.

To control that converted payments and payments received in the cash flow budget are included in the correct lines in the cash flow plan, for example, you need different accounts for these categories. Therefore, several tables are used for different sets of lines. For this purpose you can use budget accounts or the cash accounts used in the sub-ledgers.

All tables created for the same accounting year are automatically included when converting the values.

For detailed information on how to construct an account conversion table, see Create Account Conversion Table for Cash Flow Budgeting.

Defining ranges and target accounting strings is a critical step in the cash flow conversion. Therefore, you need to have a thorough understanding of the company's chart of account.

Using Account Conversion Levels

Account conversion levels are used when a budgeted income or cost in a profit and loss budget affects the entity's cash flow on more than one occasion. The levels refer to the order of potential cash flows to be posted on separate accounting strings.

You can define account conversion tables per level for each accounting year, from 0 to 9. Level 0 always retrieves values from the original profit and loss accounting string. Level 1 converts the results of conversion on level 0 to a new accounting string, and so on. That is, all converted values on levels 1 to 9 are based on the previous level. In theory, all nine levels can be used. In practice, normally only levels 0 to 2 are used.

Examples of Using Account Conversion Levels

The models below illustrate how accounts conversion is performed in levels.

Example 1

The first example can be used for both long-term cash flow (cash flow budgeting) and short-term cash flow (cash flow planning):

Comments:

Example 2

The second example concerns budget values for invoicing in account receivable. Thus, it would only be used when creating a cash flow budget to review the long-term cash flow.

As you can see from the two examples above, the structuring of conversion levels is identical, regardless of the type of cash flow budget for which the values are intended.

Stage 2: Values are allocated in time

Simultaneously with the account conversion, the values are automatically allocated in time according to defined percentages. The allocation is based on an allocation table defined in 'Allocation Table. Open' (CFS015).

This table also consists of up to 999 lines. For each line you define the period in the profit and loss budget from which the allocation is made. You also define the period in the cash flow budget to which the allocation is made. Within the period up to five calendars day can be defined as payment days. You then specify a percentage of the total payment to be allocated to each payment day.

Note: The percentage must not be 100%. Sometimes you may want to allocate more or less than 100%, for example, to compensate for extra costs.

Since you connect one allocation table per line in the account conversion table, you have great flexibility in defining the allocation.

Examples of Defining an Allocation Table

The following example illustrates how you can define the allocation table. Normally you would only need to define one or two allocation lines: You use instead a separate allocation table for each target accounting string in the combined account conversion table for the current year.

For detailed information on how to define allocation tables, see Create Allocation Table in Cash Flow Management.

In account conversion example 1 above, you pay your employees their salaries/wages on the 14th and 29th each month. However, you do not pay the tax at source and social security expenses until the 12th the following month.

There is only one exception to this pattern: You pay the vacation pay in the middle of June. The vacation pay in this case is a 12% overhead on the monthly salary.

Therefore, you allocate the salaries/wages in the following way:

From

period

To

period

Day 1

%

Day 1

Day 2

%

Day 2

Day 3

%

Day 3

Day 4

%

Day 4

Day 5

%

Day 5

= = 14 50.00 29 50.00            

This means that the period balance for salaries/wages in the selected profit and loss will be split in halves and posted on the 14th and 29th respectively in the corresponding period in the cash flow budget.

As for the vacation pay, it is allocated by adding a 12% overhead on each period balance to the middle of period 6, June. You specify this in a separate line in the same table, since you use the same account:

From

period

To

period

Day 1

%

Day 1

Day 2

%

Day 2

Day 3

%

Day 3

Day 4

%

Day 4

Day 5

%

Day 5

= 06 15 12.00                

For the two taxes you create a separate table:

From

period

To

period

Day 1

%

Day 1

Day 2

%

Day 2

Day 3

%

Day 3

Day 4

%

Day 4

Day 5

%

Day 5

= +01 12 100.00                

This way, the converted period balance from the profit and loss budget is posted on the 12th in the following month.

This way, the converted period balance from the profit and loss budget is posted on the 12th in the following month.

Stage 3: The cash flow budget is updated with the converted values

When creating a cash flow budget in 'Cash Flow Budget. Open' (CFS100), this happens:

In the cash flow budget, the converted values are listed per period and day for each target account. The levels used in the conversion flow are not displayed.

In most cases it would be more convenient to create a separate, not previously used cash flow budget in (CFS100). However, you may also select the base profit and loss budget as the cash flow budget.

Structure

The models below illustrate how the automatic cash flow conversion is performed and defined. Refer to the see also section for documents explaining the respective steps.

Conversion Flow

  1. Expenses/Revenues entered in Profit & Loss Budget

  2. Accounting String Ranges Selected

  3. Values Allocated per Period, Day and Percentage

  4. Selected Values Posted on New Accounting String

As an outcome, actual payments or payments are received in Cash Flow Budget

Once the definitions are made, the process is entirely automatic.

Defining Cash Flow Conversion

  1. Estimate Payment Days

    Note: This step requires a good understanding of the company's payment and accounting routines.
  2. Define Allocation Table

  3. Review Company's Chart of Account

    Note: This step requires a good understanding of the company's payment and accounting routines.
  4. Define Account Conversion Table

  5. Select Profit & Loss Budget and Create Cash Flow Budget

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