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 purified basics: 'Logic first' - Examples relating to cash flows

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)

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?

Contrarily, 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.

References: These examples may encourage you to read the page on liquidity and IFRS 18. 

Agicap. Lenglet Romain (2024) What is the self-financing capacity (SFC) of a company? A quote: "By calculating its self
financing capacity, the company can estimate its capacities to invest and its need to resort to loans."
https://agicap.com/en-us/article/self-financing-capacity-definition-calculation/

Anders Georg (2024): Verabschiedung des neuen IFRS 18 „Presentation and Disclosure in Financial Statements“. Ein wesentlicher Beitrag zur Verbesserung der Finanzberichterstattung!? (Adoption of the new IFRS 18 "Presentation and Disclosure in Financial Statements". A significant contribution to improving financial reporting ? PiR No. 5 from 10.05.2024, page 127. https://datenbank.nwb.de/Dokument/1043760/

Beresford Dennis R. (1988) The ‘Balancing Act’ in Setting Accounting Standards. Accounting Horizons 3/1988
https://www.sfu.ca/~poitras/cash-flow-stmt-history.pdf

FINANCE-Online. Becker Julia (2015) Kritik an IFRS reißt nicht ab (Criticism of IFRS continues).
https://www.finance-magazin.de/finanzabteilung/bilanzierung/kritik-an-ifrs-reisst-nicht-ab-29782/

Hossain Moazzem, Alam Manzurul, Alamgir Mohammed, Salat Amirus (2022) Accounting students' perceptions of the barriers on IFRS study in the accounting curriculum.
https://www.researchgate.net/publication/361546751_Accounting_students_Wahrnehmungen_der_Hindernisse_für_das_IFRSStudium_im_Lehrplan_der_Rechnungslegung

Partners Finances. Mehareche Sylvain (2022) Le free cash flow ou flux de trésorerie disponible : suivre l'évolution du besoin de financement (Free cash flow: monitoring changes in financing requirements).
https://www.partners-finances.fr/actualites/474-free-cash-flow-flux-tresorerie-disponible-suivre-evolution-besoin-financement

Sahay, Savita A. (2022). Usefulness of Cash Flow Statements. (Rutgers - State University of New Jersey, USA).
In: Lee, CF., Lee, A.C. (eds) Encyclopedia of Finance. Springer, Cham, pp 1657–1683.
https://doi.org/10.1007/978-3-030-91231-4_72

 

Let's embrace digitalisation in the field of 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. 

In 1983/84, the author created a double-entry table using only plus and minus signs, which completely simplifies 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'.

Look at the 'i Double-Entry Table Digital Logic.XLSX' as to see how accounting theory can now be taught in just one hour by showing example entries. Save yourself and your students time for things that really matter.

Proposals in this regard have been made by academics in Indonesia, India and several US states.
• Karen V. Pincus (University of Arkansas, USA) – questioned whether teaching debits and credits is essential in introductory accounting.
• Rai & Sisneros (USA) – found no educational advantage from teaching debits and credits before introducing accounting concepts.
• Sony Warsono (Indonesia) – revisited the theory of double-entry bookkeeping from the accounting-equation perspective.
• G. Francis Xavier (India) – published a book explaining accounting without using debit and credit.
• Bookkeeping Studio (Australia) – argues that modern bookkeeping differs fundamentally from historical bookkeeping.
• Klever+ (USA) – explains that electronic calculation removed the historical burden of mental arithmetic.
• Maple Hill Services (UK/India) – describes traditional bookkeeping as largely a historical method.

Links to these sources:

Bookkeeping Studio, Author Gethen B (2024) Traditional vs. modern bookkeeping.
https://thebookkeepingstudio.com.au/bookkeeping/traditional-versus-modern-bookkeeping/

Klever+ (2024) The evolution of bookkeeping: From old-school ledgers to digital marvels.
https://www.linkedin.com/pulse/evolution-bookkeeping-from-old-school-ledgers-digital-marvels-ub9wf

Maple Hill Services (2023) Is traditional bookkeeping a bygone era now?
https://www.maplehillservices.com/post/is-traditional-bookkeeping-a-bygone-era-now

Pincus, KV Is teaching debits and credits essential in elementary accounting? Issues of Accounting Education
(1997) 12 (2), 575-579. 11
https://www.proquest.com/docview/210893454?sourcetype=Scholarly%20Journals

Rai A, Sisneros C Evaluating pedagogy in educating business. An empirical analysis of teaching accounting without
debits and credits. Accounting and Financial Control (2018) 2(1), 15-26.
http://dx.doi.org/10.21511/afc.02(1).2018.02

Warsono S (2017) The Accounting Equation and Revisiting the Theory of Double-Entry Bookkeeping
https://www.researchgate.net/publication/320912369_The_Accounting_Equation_and_Revisiting_the_Theory_of_Double-Entry_Bookkeeping

Xavier GF (2012) Anyone can understand financial accounting and analysis without debit and credit. A revolutionary innovation in accounting.
https://www.flipkart.com/financial-accounting-analysis-without-debit-credit-revolutionary innvoation/p/itmefwq8ubgrkhzs

Summary: Several authors from different countries have questioned the necessity of teaching the traditional debit-credit convention or have proposed alternative approaches to introductory accounting. The present papers build upon these developments but go one step further by presenting a complete logical framework for digital double-entry bookkeeping, including the double-entry table and the checksum principle.

 

Key areas and extensions that are not found in textbooks

- 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. The second
method starts with contribution margins.
If there are different classifications of costs, you can use the double-column scheme shown to perform the analysis or planning 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.The main question than
change to « How can the company survive the first years »?

Remark: The cash flows 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'.