Investment controlling in an international group can be exercised through reporting or cash management. The scope and governance of investment controlling defines the subsidiaries’ options and freedom of action. The investment controlling for a subsidiary tracks the strategy execution and reduces risks.
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Cash management for investment controlling
The monitoring of cash flows in a cash management system represents an essential task of the ongoing control of the subsidiaries. Especially at mid-year and year-end, the liquidity policy of listed companies is very limited, which is why cash flow planning and compliance with it is a top priority. Often the cash flow (cash flow statement) is equal in importance to “profit before taxes”.
The cash report serves to disclose the cash movements of the last observation period to the parent company. In it, all cash movements should be reported subdivided according to the following criteria:
- Cash in (advance payments, customer payments, intercompany payments, third party interest and intercompany)
- Cash out (down payments, suppliers, payments intercompany, taxes, wages and salaries, interest of third parties and intercompany)
The balanced cash-ins and cash-outs of a week result in a cash inflow or cash outflow of the observation period. The cash flow forecast is used for liquidity planning and should be prepared and continuously updated on a weekly basis.
A plan-actual deviation analysis should be carried out on a weekly basis, resulting in a corresponding adjustment of the current plan. In any case, it should be ensured that expenditures outside the operational business (e.g. payments above a certain amount or expenditures for fixed assets) are subject to prior approval.
A prerequisite for group planning is that uniform forms are made available to the subsidiaries. By taking advantage of all financing variants of the subsidiaries (capital increase, grants, loans, payment terms of affiliated companies, etc.), the companies can be controlled financially. However, a prerequisite is that central coordination and ongoing control of the subsidiaries is undertaken within a tight cash management system. Without ongoing control, the risk of unwanted cash outflows is disproportionately higher.
Reporting for investment controlling
The use of an IT-supported reporting system for investment controlling purposes is indispensable in large corporations in order to consolidate and analyse the abundance of data in orderly structures. The reports should be prepared monthly in order to have ongoing control over the asset, financial and earnings situation of the subsidiaries. Depending on the size of the company, between two days and one week should be planned as the time required for the monthly financial statements. The differentiation according to the size of the subsidiaries should also have an influence on the scope of the reports. So it does not make sense to burden a pure distribution company with the total scope of the reports.
As a rule, it makes sense to create the reports according to global accounting rules and not according to local law. This means that a guideline must be defined for the valuation criteria to be used. IFRS or US GAAP can be used as international standards.
However, this also means that the local accountants must be familiar with these rules and must be trained accordingly. Furthermore, they must be able to carry out a revaluation of the monthly report from local law to international law.
The following structure can be used as a basis for reporting:
- Profit and loss account
- Balance sheet
- Cash flow statement (automatic calculation)
- Expenditure on fixed assets (purchase or leasing)
- Receivables table
- Stock development
- Overhead cost analysis
- Analysis of the credit notes
- Workforce analysis
- Other income and expenses
- Cash flow planning
- Key figures (automatic calculation)
- Liabilities schedule
- Analysis of the article groups (turnover, cost of sales, overheads, net profit)
- Order status
The correlation of these variables is also important for ongoing monitoring: Incoming orders – Order backlog – Turnover:
Cumulated incoming orders minus cumulated turnover = order backlog
These three variables are to be updated continuously and contribute significantly – in addition to cash flow and PBT – to the evaluation of the subsidiaries, as orders and turnover are thereby brought into a closed system. If, for example, incoming orders are reported too high, this leads to a non-decreasing order level (since no corresponding turnover is generated) and can thus soon be detected by the controller.
In the profit and loss account, the recognition of imputed items (such as interest on capital employed and group allocations) can already lead to an increase or decrease in the income statement at the individual financial statement level, with the aim that these imputed items are earned in addition.
The overhead cost analysis should be linked to certain specifications, such as: Sales expenses should not exceed X% of turnover, or similar.
The statement of receivables is intended to provide detailed information on the subsidiary’s working capital management. A further breakdown, e.g. by month, is useful. Furthermore, problem cases should be described separately.
The liabilities schedule essentially serves to disclose the duration of outstanding accounts.
The comparison of outstanding days receivables with outstanding days of suppliers alone gives meaningful conclusions about the financing structure of the company.
The employee analysis serves to present the working persons in the subsidiaries (number subdivided according to groups and wage and salary costs).
Fixed asset reporting is for investment or disinvestment analysis. Any movements in fixed assets should be subject to prior approval of the controller.
The reports are not only used to present past-oriented figures, but planned figures (cash flow). Also values for production planning are to be entered. E.G.: When to expect orders received? etc.
Furthermore, the reporting system enables a monthly comparison of the budgeted values and the actual values. For the comparison, the data of the current, the previous and the budgeted year should be used.
Key performance Indicators should then be derived from the reports presented above, which allows a comparison of the most important key data of the companies and contributes significantly to a quick evaluation of the performance of the companies.
It is important for the regular consolidated financial statements that a separation is made between relationships of affiliated companies and third parties in order to achieve a meaningful consolidation. The group accounting office should also ensure that the foreign currency rates for the monthly currency translation are determined centrally and distributed to the subsidiaries. In doing so, a smoothing of exchange rate fluctuations should be taken into consideration.
Regular visits to the subsidiaries and personal contact with the persons in charge are indispensable. It is necessary to convince oneself personally that the reported figures correspond to reality.
The Group’s reporting system determines the scope for action and the information obligations. Cash management also regulates liquidity management in the group. The reporting system should be derived from the accounting data with the help of automation in order to keep the effort of preparation as low as possible. Contact us to determine the reporting and investment controlling system for your company.