Who benefits from this approach?

Entrepreneurs, business management analysts, planners, teachers, consultants and bankers can all benefit. This includes business journalists, future master craftsmen and high school graduates. Some may soon enter politics or be appointed to a company's supervisory board. Indeed, anyone involved in economics at schools, universities, training centres or in politics can reap the rewards.

Those who believe in 'standards' such as IFRS 18 are invited to reconsider their views on 'cash flow statement' and 'income statement' after reading this approach.

Simplifying for entrepreneurs' success

There is a long list of business management authors, particularly in English and French, who offer valuable advice to entrepreneurs and people setting up a new business. However, many fail to establish a connection with performance indicators.

These writings contain a lot of criticism in order to make business management easier to teach and implement. Using the same terms in analysis and planning removes any barriers. Contribution margins may act as a bridge.

The time available for business management is limited. Entrepreneurs must focus on effective production methods, leadership of employees, environmental respect, pest and infection control, assurances, taxes, and their sector's public image. Additionally, entrepreneurs are facing increasing bureaucracy. In the future, there will probably be even less time available for business management. This is why entrepreneurs and supervisory boards are calling for few but meaningful business management terms.

Preferring logical paths

Towards the purified basics of business management - 'Logic first!
Examples relating to cash flow and double-entry bookkeeping'

In double-entry bookkeeping, there are four 'classes of accounts'.

•  Financial accounts
•  Tangible asset accounts
•  Profit accounts (income and expenses within the company)
•  Private/personal accounts (deposits and withdrawals outside the company).

The result of the profit accounts (before year-end entries such as depreciation are made) is the 'gross cash surplus'. You can then move to cash flow 3 using the 'direct method'.

    Gross cash surplus
 ± one-time payments → cash flow 1 (cash flow from operational activities) →
 + adjusted deposits
 – adjusted withdrawals → cash flow 2 →
 – repayments (in accordance with business principles) → cash flow 3

This staggered cash flow system (Cf1 to Cf3) is closest to accountancy. Cash flow 3 is known as 'self-financing capacity' or 'capacité d'autofinancement' in France. A similar concept appears in 'quality-of-earnings analysis' in the US. This system has been proven in German agricultural business management. My students taught me an important question: how much cash is left for investment? This cash flow for financing investment is a more useful concept than 'free cash flow' or 'debt service limit'. 

The structure of Cf1 to Cf3 is easy to learn. However, as a consultant or teacher, you need to delve deeper into 'one-time payments', 'adjustments', and 'business principles'. For example, how should repayment deferrals or unscheduled repayments be handled when assessing sustainable liquidity?

On the other hand, the 'cash flow statement' (or 'capital flow calculation' in Germany) is an outdated concept that was originally developed for internal use in accounting firms. Despite the fact that new loans are also counted as cash-in like own funds, the FASB and IASB, both accounting boards, reinstated it. These accounting boards categorise cash flows into three activities. Unlike US GAAP, IFRS 18 also separates the 'income statement' into three categories. Expenses for loan interest have been transferred out of cash flow from operational activities. Interest is now deducted from financial activities, where journalists probably don't look at. This leads to international confusion because the US FASB does not follow the IASB's approach. In any case, neither cash flow nor income statements provide useful information for entrepreneurs or supervisory board members, such as self-financing capacity.

Let's accept digitalisation in bookkeeping theory too!

In the past, accounting was done using mental arithmetic. Each column could only have one sign: the plus sign. This is why the invention of debit/credit was so important. This changed decisively in the 1960s with the introduction of digital counting. Since then, changing the signs in a column has not been a problem. Proposals in this regard have been made by academics in Indonesia, India and several US states.

In 1984, the author created a double-entry table using only plus and minus signs, which completely simplified accounting theory. This double-entry table encompasses the four fundamental categories of accounts. You can compare the potential of digitalisation with traditional accounting theory, see chapter 9 and section 3.2.4 of my paper 'i Business Management – Basics, Indicators, Examples.pdf'.

Take a look at the 'i Double-Entry Table.xlsx' to see how accounting theory can now be taught in just one hour. Save yourself and your students time for things that really matter.

Key areas and extensions

Profitability, liquidity and stability form the core of business management.

Entrepreneurs should be informed of the costs and benefits of their business divisions as soon as possible. This can be achieved using the 'Company Allocation Sheet'. However, you could consider adopting the approach used by newcomers to business, even within an existing company. With a double-column scheme, calculations can be performed according to different classifications simultaneously.

When planning, you can either compare different target alternatives or use a year-on-year planning approach. The latter is preferable if the company is experiencing financial difficulties. The same applies when new production methods have already been implemented.

Note: The cash flow scheme from 1 to 3 and the term 'self-financing capacity' were invented by others. I may have introduced the depreciation metric. The 'replacement investment coverage percentage' is a reflection of the utilisation of the 'debt service limit percentage'.