The Essence of Corporate Cashflow Sustainability
26 Jan, by
“The Essence of Corporate Cashflow Sustainability’ is my first Finance book, which was published and distributed in early June 2022. It is not an academic treatise but one written based on my decades of corporate experience both at the Finance and Operations senior executive levels.
The synopsis, outline and preface of the book (including book testimonies & reviews) follow.
In the area of cashflow management, current practice focuses on projected cashflows, which are short-term in nature and by design. This book explains how you can develop, build, monitor and assess Cashflow Sustainability (in a Framework with 50 coloured diagrams in 200-odd pages) for the long-term to support your company’s ongoing growth.
Please do not hesitate to contact me at michael@cfodesk.com.sg if you need further information.
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Synopsis:
A wide gap exists between accounting theory and practice in respect of the “separate entity” and “going concern” concepts. With these concepts, practice needs to ensure that the company really exists in perpetuity. Theory does not provide the “bridge(s)” to reach that place.
At the outset, the company must acknowledge that it must create, grow and enhance shareholder value continually for its shareholders. One key component of shareholder value is Cashflow Sustainability.
Cashflow Sustainability is the ability to sustain corporate growth through continuous cashflows. The question then is “how are we assured that the company has Cashflow Sustainability? “. We cannot look towards lagging indicators to provide the answer because they are based on historical transactions and events. We need leading indicators, which help guard and project the future.
This book introduces 3 such indicators, which I have designed. These are
- Financial limits to growth (FLTG)
- Two-level sales analysis (TLSA)
- Trend Cashflow Statement (TCFS) Analysis.
Cashflow Sustainability cannot happen overnight. It must be built, monitored, and assessed. To build it, we must turn to the Economic Resources Approach to Accounting ((ERAA), which I have created. Accounting revolves around the capture, utilisation, and performance-assessment of economic resources. ERAA ensures that at critical stages, economic resources are monitored, measured, and assessed. ERAA also involves “rolling loop” thinking because economic resources flow continuously.
Other key areas that contribute towards Cashflow Sustainability are capital structure and sales growth.
There are 3 metrics to assess Cashflow Sustainability, the main one being Trend CFS Analysis. We analyse the trend behaviour of P&L PAT (Profit After Tax) and Cash PAT. When they run almost in step, “feeding” each other, we are quite assured that our efforts in building and monitoring Cashflow Sustainability eventually pay dividends!
Overall, this book attempts to build the “bridges” for accounting theory to cross into the practice of building, monitoring, and assessing Cashflow Sustainability enabling the company’s existence in perpetuity, and for practice to use the same bridges to satisfy accounting theory!
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PREFACE
The Essence of Corporate Cashflow Sustainability
There has been a growing need and desire for C-suite professionals, non-Finance Board directors, and Finance Leaders to:
- learn accounting & finance in an easily comprehensible manner
- understand the flows and interrelationships among financial statements
- appreciate the importance of shareholder value and its drivers
- understand what drives cashflow sustainability for the going concern assumption to be upheld, and ensure that the company’s cashflow is visibly sustainable
This book addresses all the above needs and more. It is the distillation of my more than 40 years of corporate exposure and experience as Group CFO of 3 main board public-listed companies/conglomerates in Singapore and as CEO/MD/Director of companies in various industries.
In this book I shall also introduce my own concepts and principles which I have developed through critical thinking and profoundly educated analysis. They do not represent the views or pronouncements of any professional institutions. These are
a) Economic Resources Approach to Accounting (ERAA),
b) Lagging & leading indicators (typically, Financial Limits to Growth (FLTG) and 2-level Sales Analysis (TLSA)),
c) I.S.A. Approach to Financial Management,
d) Cashflow return on working capital,
e) Period & Trend Cashflow Statement Analysis, and more.
An integration of these new and existing concepts and principles would enable cashflow sustainability to be better understood and managed, for the benefit of all stakeholders, especially the discerning shareholders.
With an in-depth understanding of concepts and principles, both new and existing, and the flow of economic resources through the financial statements, the discussion emphasises on
- using lagging indicators to uncover what have gone wrong
- applying leading indicators to forewarn what could go wrong, providing financial guard rails, and protect sales growth from being too aggressive, which could lead to financial disaster
- capital structure, leverage and risks and their impact on and implications to financial planning, operational performance, and shareholder value
- applying a 7-step approach to analyse the period cashflow statement, to unlock cashflows for corporate growth, and have a fuller appreciation of where cashflows are heading, and finally
- applying a 5-step approach to analyse trend cashflow statements to assess the company’s cashflow sustainability.
Without cashflow sustainability, shareholder value will be eroded and going concern assumption is threatened!
As this book is written largely for the busy C-suite professionals, Finance Leaders, and other non-Finance professionals, I have adopted a blend of narrative, bulleted, and coloured illustration format, as contrasted to a purely narrative format.
This book is written based on the depth and breadth of my corporate experience and exposures, and very little academic references are necessary. It is a book written by me, a practitioner, to all practitioners and professionals! In each chapter there will be a section on how, as a practitioner, you could apply what you have read.
I trust you will be enlightened by the rich new contents in this book and apply them in your corporate financial management and corporate strategic planning.
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Author’s outline of book
With over 40 years of corporate experience and exposure as Group CFO of 3 main board public-listed groups in Singapore and as CEO/MD/Director of large companies in various industries, I have gained much breadth and depth of knowledge in both finance and operations. As I am also a trained teacher, counsellor, and facilitator, I manage my own company The CFO Desk Pte Ltd in training and seminars, and financial consultancy, post full-time employment.
In 2017, I started designing Masterclasses for finance managers and non-finance professionals. Two of the most successful Masterclasses (Appendices IA & 1B) are
- The Finance Managers’ Masterclass (now in its Run 24, at this writing), and
- The Finance Leaders’ Bootcamp.(now in its Run 8)
These Masterclasses are ongoing, one run after another, and they are career-enhancing with lots of new accounting and finance concepts and principles, which I have developed over the years. These new concepts and principles are refreshing and enlightening and can be readily applied at work to enhance job performance. The Masterclasses are delivered over Zoom online facility and participants come from Singapore, Malaysia, Brunei, Hongkong, Turkey, and UK.
Arising from the conduct of these Masterclasses and with encouragement and feedback from students/participants and friends, I have decided to share my new accounting and finance concepts and principles in a book to benefit eager life-long learners worldwide.
Throughout my career, I realise that many C-suite executives and accountants are not fully aware of the vital importance of cashflow sustainability of the company to ensure its continued existence in perpetuity. Some are aware but do not have to knowledge and skills to keep the pace. This book is written to help in that mission.
To facilitate the understanding of the organisation of this book I have created an “onion” schematic diagram of the flow of topics leading to the capstone topic of corporate cashflow sustainability assessment.
Framework of Accounting
The book begins with an understanding of the framework of accounting and how it forms the foundation of the accounting profession. Central to the framework are the assumptions of separate entity and going concern, which stipulates that an entity is assumed to continue its existence in perpetuity. From the practitioners’ perspective, it would mean that the company must continue to grow and generate shareholder value, which would require corporate cashflow sustainability.
Scope of Accounting and Finance
The scope of accounting and finance is next discussed, and this allows the reader to have a bird’s eye view of where each subsequent topic fits.
“Onion” Schematic Diagram – Organisation of this book.
Shareholder Value and V.I.S.A.
For going concern to be upheld, shareholder value must grow and be enhanced. In addition, we must be aware of the pieces of the financial statements (Balance Sheet, P&L Statement, and Cashflow Statement) that could cause the company to fall apart. For this, I introduce the acronym V.I.S.A. to stand for Volatility, Impairment, Sustainability, and Adequacy for each significant area of the resource flows, as captured in the financial statements.
Economic Resources Approach to Accounting (ERAA)
Central to accounting and finance is the recording of transactions and management of economic resources. These resources flow through the systems incessantly over time and we must identify the critical stages of their flows, and measure and assess their performance at these points. I created the concept of ERAA (Economic Resources Approach to Accounting) for this purpose. The critical ERAA stages are funding, allocation, utilisation, performance assessment, growth and re-allocation, and de-funding/re-funding. As economic resource flows are continuous, “rolling loop’ thinking is a necessary component of ERAA. ERAA and my other concepts and principles are integrated to form a new resource management model.
Capital Structure and WACC
The genesis of economic resources in a company is funding. Funding resources come in 2 distinct areas, namely, equity (internal capital) and debt (external capital). The average cost of capital weighted by the proportion of equity and debt is the Weighted Average Cost of Capital (WACC), which is the “hurdle rate” for acceptability of new investments. WACC is therefore a critical determinant of new shareholder value generation.
Lagging and leading indicators
The performance assessment of economic resources at critical stages can be conducted using traditional financial ratio analysis, which I term as lagging indicators because they only uncover what have gone wrong. For upholding going concern assumption, and preserving and enhancing shareholder value, we need indicators that warn us what may or could go wrong soon. These are the leading indicators.
I have created a leading indicator which I called “2-level Sales Analysis (TLSA)” and this indicator examines sales at the trend and segment levels. Within the TLSA is the Financial Limits to Growth (FLTG), which warns of excessive sales without adequate resource support. TLSA and FLTG can be considered as guard rails to prevent unnecessary financial disasters.
Assessment of Cashflow Sustainability
Having understood the Framework through to Financial Analysis using both lagging and leading indicators and taking corrective actions along the way, we are now ready to assess the state of the company’s preparedness in creating cashflow sustainability. This assessment is discussed in Chapters 8 and 9 when we analyse the cashflow return on working capital (EBITDA/WC), the 7-step analysis on the Period Cashflow Statement, and the 5-step analysis on the Trend Cashflow Statements.
Conclusion
I trust this book will enable practitioners (CFOs, Finance Managers, commercial accountants, and the like) and non-Finance professionals (CEOs, COOs, MDs, Directors, lawyers, company secretaries, and the like) to have a better and fuller knowledge and understanding of accounting and finance at its core – the requirement for Cashflow Sustainability to protect and maintain the Going Concern assumption.
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BOOK TESTIMONY
The Board and top management’s most pressing concerns are not merely cashflows but sustainable cashflows. Some companies fail due to lack of attention to the company’s cashflow sustainability and its financial limits to growth. It is with the assurance of sustainable cashflows that a company can implement its plans for corporate growth and expansion into the future, confidently and successfully.
Admittedly, not many companies know how to manage this critical area with confidence. Current textbooks and finance literature do not explore this topic adequately, much less practical experience.
With his 40-odd years of Group CFO experience in 3 main board public-listed companies in Singapore, and his exposure to operations at senior executive level, Michael attempts to bridge the gap between theory and practice. In the process, he has created and designed new concepts and principles that are relevant to the sphere of practice. These are the economic resources approach to accounting (ERAA), leading and lagging indicators, 2-level sales analysis, financial limits to growth, period and trend cashflow statement analysis, to name a few. These new concepts and principles are weaved and integrated into current accounting theory to derive a framework and an approach to build, monitor, and assess cashflow sustainability.
It must be recognised that the framework and approach developed by Michael is a potent one but not a “one-size-fits-all”! Implementation requires adaptation to the characteristics of the industry in general, and to the needs and requirements of the company in particular.
I recommend this book to non-finance board directors and management executives.
Chew Heng Ching
Chairman, RHT Grace Institute
Founding President, Singapore Institute of Directors
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In his professional life, Michael moves the earth – he is vastly knowledgeable and experienced, street-smart and goes straight for the jugular. As a result, he is devastatingly effective. The contents of this book are but a distillation and reflection of Michael’s professional perspectives and wisdom. I would highly commend it.
Francis Xavier
PBM FCIArb C.Arb, LLB (Hons)
Senior Counsel, Supreme Court of Singapore
Solicitor, Supreme Court of England and Wales.
Regional Head, Dispute Resolution
Commercial Litigation
Investment Treaty and International Commercial Arbitration
RAJAH & TANN SINGAPORE LLP
RAJAH & TANN ASIA LLP
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Rarely do we come across a book that does what it says in the cover. This book is an exception. Using sustainable cashflow as a central theme, Michael provides a holistic approach of why and how sustainable cashflow is the foundation and impetus for thriving businesses. Michael is able to integrate the various financial and accounting concepts in a clear and systematic manner. At the same time, he introduces new and practical approaches such as Economic Resources Approaches to Accounting (ERAA), V.I.S.A. Approach to Financial Management and 2-level Sales Analysis (TLSA). I find these extremely useful in understanding complex topics such as funding, asset allocation and risk assessment. The book is written with clarity and simplicity. This makes reading it an enjoyable experience.
Dr. Cynthia Tan ,
Independent Director,
Kingsmen Design Pte Ltd
Valuemax Group Ltd
Executive Vice-President,
Head, Group Human Resources (2005 – 2015)
OCBC Bank
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This gem of a book is a must-read for finance professionals and business owners. Michael has distilled complex concepts into bite-sized information that can be easily understood and applied to day-to-day operations. There are no boring academic theories in here; only practical insights gleaned from over four decades of corporate finance and management experience.
Michael Tan,
CEO,
Singapore Productivity Centre
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This is a brilliant source of insight and information covering all aspects of the essence of corporate cashflow sustainability. Every reader will take away something from Michael’s 40 years of corporate experience and exposure in corporate leadership.
I like the way Michael presents his approaches in cashflow sustainability analysis and assessment. This book will prove useful for C-suite Professionals and Finance Leaders in building the most efficient structure to ensure that the company’s cashflow is visibly sustainable.
Eddie Lee,
Managing Partner,
Pinebridge LLP
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Michael’s book dwells on a subject matter that is extremely crucial in business, which is made even more apparent during a tough business climate made worst by the pandemic. Cashflow management is vital ,but it is strangely often overlooked. Much emphasis has been placed on profitability (which is natural and sensible), but even more important is good cashflow management because without it, the sustainability of the business will be challenged.
Great plans for the future can be sabotaged due to bad cashflow management. Effective cashflow management not only helps to turn plans to reality, but it also compels the management to manage their resources in a much more efficient and effective manner. Michael’s hard work in putting together this precious book will surely enable non-finance-trained executives and business owners to grasp the concept and the important basic principles quickly.
Albert Kong
Founder/CEO
Asiawide Franchise Consultants Pte Ltd
http://linkedin.com/in/albert-kong-b145b1
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Traditional indicators of a company’s financial health are often centred on financial ratios based on past performance, as taught in academic books. Stakeholders and market watchers also focus on company profitability to evaluate companies and their ability to carry on as a going concern. In today’s extremely volatile and ambiguous market environment, every organisation must be nimble to cope with varying market changes. The sustainability of an enterprise centres on cash flow, be it a profit-making or a not-for-profit organisation. Michael’s book offers newly developed leading indicators to measure financial sustenance on a long-term and mid-term basis, on top of traditional lagging indicators.
C-suite professionals who are truly concerned with the financial state of the respective organisations they are responsible for, including non-executive directors, would find this book an essential guide. It will enable them to have a deeper understanding of the latest situation the organisation is in. These professionals, who may or may not be directly responsible for financial management, can make appropriate recommendations and take action as necessary, or at least ask the right questions, before it is too late.
Perlita Tiro
BBA, CPA, MBA (Finance)
Member, PMC Certification Board, SBACC
Executive Search Consultant, 1980-2016
Management Consultant, 1968-1980
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Michael’s 40 years of corporate, accounting and finance experience is now at your fingertips in an accessible manner. Business owners and management need to read this book to understand how cashflow sustainability impacts shareholder value. Moreover, the introduction of his own concepts and principles provides useful tools and guides to help you think about how you can better assess, manage, and plan for your business as a going concern.”
Gerald Woon
Director, The Cogent group of companies
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When it comes to corporate cash flow, there are loads of commentators, but Michael Lee articulates an experienced-based, well-reasoned and spot-on assessment of cash flow realities for corporations to ensure continued existence in perpetuity.
In today’s Volatile, Uncertain, Complex and Ambiguous (VUCA) world, Michael’s holistic approach to manage risk in corporate cashflow sustainability is very relevant. His emphasis on the use of lagging indicators to uncover what has gone wrong and apply leading indicators to prepare for what could go wrong provides financial guard rails and protects sales growth from being too aggressive, which could lead to financial disaster.
C-suite, professionals, finance leaders, and other non-finance professionals should use this book as a sanity and reality check to challenge their organisation’s cashflow sustainability. Many would find his practical insight and guidance invaluable.”
Roland Teo,
Head of RIMS (The Risk Management Society),
Regional Advisory Group for Singapore/Southeast Asia
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