Disclosing the sources and uses of cash

Disclosing the sources and uses of cash

The recent collapse of Thomas Cook has served to highlight the importance of understanding cash flow within a business. Tales have emerged of holidaymakers, some of whom will have paid in full months in advance of the holiday date, being required to make further payments by hotels which in the normal course of events would have expected to be remunerated some time after the holiday had completed.

Receipts in advance and payments in arrears may on the face of it be an attractive proposition but, as can be seen by the Thomas Cook case, it is only part of the story. Nevertheless, the source and use of cash is an important indicator for investors. So much so that in September 2019 the Financial Reporting Council (FRC) issued a report examining best practices in respect of cash disclosures.

The report makes the point that the “understanding of the generation, availability, and use of cash is fundamental to the investment process, both in the assessment of management’s historical stewardship of a company’s assets, and in supporting analysis of future expectations.” However, whilst useful in itself, the cash flow statement only tells part of the story. In fact, FRC research has revealed that in a number of instances the level of disclosure required by investors cannot be found either within the cash flow statement or indeed within the annual report.

In response to this the FRC is recommending that companies look towards providing more detailed disclosures in support of the cash flow forecast. In respect of the source of cash, the disclosures should reveal how the company’s business model generates cash and the drivers of performance that generated cash in the current period. There should also be a demonstrable link between cash generation and strategy, working capital and risks; thereby allowing an assessment of future cash generation.

In respect of the uses of cash, disclosures should set out a framework of priorities for the cash generated. These should support understanding of the priorities in action and highlight relevant risks, restrictions and variabilities.

In addition to the source and uses of cash, the link between cash flow and working capital should not be ignored. This can also be an important indicator not only of past performance but also of the way in which changes to the operating model may impact future risk.

In all instances the FRC recommends that decisions in respect of disclosure follow the five key principles of disclosure in that they are aligned to strategy, transparent, in context, reliable, and consistent.


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