The Research of Cash Flow Management in Group Enterprise
Rui Hou, Hong Yin, Jin-yuan Zhong, Cun Li
Department of Electrical Engineering, Kunming University of Science and Technology, Kunming, China
(yhfine@163.com, hourui1987a@126.com)
Abstract - Cash is the important assets of enterprise, and
cash flow is compared to the enterprise’s blood, which is
formatted by the cash inflow and outflow. Combining with
the present situation of the current cash flow management
research and the general flow of cash flow management of
group enterprise, some existing problems of cash flow
management situation of L Group enterprise had analyzed.
And cash flow management model of L Group enterprise
was put forward in the paper, from those aspects of in
construction of the organization, cash flow analysis, budget
management, operation management, risk control,
performance evaluation and system guarantee.
Keywords - Cash flow, Cash flow budget, Cash flow
management, Group enterprise
I. PREFACE
Cash is the important assets of enterprise, and the
cash flow is formatted by the cash inflow and outflow.
The cash flow has reacted vitality of the enterprise, which
is very important to the enterprise, and a powerful
enterprise must have sustained, healthy cash flow[1]. In
recent years, the sudden collapse of large enterprise
groups, which has worldwide influence, like Enron,
Worldcom, Electric Group, American Airlines, Lehman
Funds, make people increasingly realize the important
role of cash flow. In a sense, the ability of the enterprise
to obtain cash is more important than profit ability. The
purpose of cash flow management is to ensure the
required cash of the production and operation activities of
enterprises, save money as far as possible, and spend
spare cash on investment, then to get more investment
income[2]. Profit is the embodiment of the enterprise
profitability, certain profit is the embodiment of the
enterprise, which is sustainable development, and profits
that can more turn to cash is related to the survival and
sustainable development of the enterprise. Enhance the
level of the enterprise’s cash flow management, which
means improve the survival and the ability of sustainable
development of the enterprise.
Through by analysing the general model of cash flow
management of group enterprise, and combining with
present situation of cash flow management of L Group,
the problems of cash flow management of L Group had
proposed, and the model of cash flow management of
group enterprise had tried to build in the paper. This will
be improvement action to cash flow management of L
Group, and have certain guiding significance to improve
the management level of group.
II. CASH FLOW
The concept of cash flow is defined as the inflow and
outflow of cash and cash equivalents. The “cash” of cash
flow include not only cash on hand of enterprise basic
account, but also deposit, deposit in other city, bank draft
deposit, cashier’s order deposit, monetary capital deposits
that’s on the road and other monetary funds, that are
deposited in the financial enterprise and can be used to
pay at any time, which are including in adjust accounts of
enterprise account. Cash equivalents generally refers to
investment of the enterprise hold, which is short term,
liquidity, easily converted into cash and changes in small
of value. For example, the short-term debt of three month
that the enterprise hold[3].
According to the exercise direction classification,
cash flow can be divided into two kinds of cash inflow
and cash outflow[4]. Cash inflow refers to the cash that
flow from the outside to the enterprise. It include market
products, service revenue, foreign borrowing, asset
recovery, investment recovery, equity funds absorption,
etc. Cash outflows refers to the cash that comes out of
enterprise. It mainly includes cash payments of the
purchase of raw materials and labor services, the
distribution of profits, investment spending, taxes to be
turned over, worker pay and other activities.
According to the entity nature and movement purpose
classification, Cash flow can be divided into cash flow of
business activities, cash flow of investment activities and
cash flow of financing activities. According to the process
of investment projects, it can be divided into initial cash
flow, operating cash flow and end cash flow[5].
III. THE PROBLEMS OF CASH FLOW
MANAGEMENT IN GROUP
L group enterprise was founded in September 2001,
and is joint-stock enterprises of State-owned that is held
by Yunnan Copper (group) Limited Company. The
company registered capital has 600 million yuan, and the
main business is the production and the sales of copper,
nickel and cobalt, molybdenum, iron and other ore
concentrate, smelting of copper nickel and cobalt
molybdenum, mining development and technical services.
A. The centralized management problems
L Group has some existing problems in the cash
centralized management. Frist of all, the permissions of
Group fund group is too small, and Group fund group,
which is the core department of cash flow management of
L Group, is just the subordinate departments of group
financial department. Therefore, it often faces with the
problem of insufficient permissions in the treatment of the
cash flow problems. At the same time, although group
affiliated enterprise shall be turned over to capital
according to the request, the enterprise can retain a part of
the capital according to oneself circumstance. When it
meets the situation of require pay, enterprise turn to the
Group, and many of the subordinate enterprise
accumulate a considerable sum of money, then it improve
the capital cost of enterprise. Meanwhile, the funds of
subordinate enterprise shall be turned over to
headquarters, and demand funds is appropriated according
to the budget request. All of this has increased the
complexity of the fund flow program and the difficulty of
group management.
B. The existing problems of cash flow budget
The existing problems of the cash flow management
model in Group mainly displays in:
1) Group’s budget management system is not perfect,
which is the cause of budget consciousness weak of group
department. The group has not put cash flow management
into the goal of enterprise strategic management and
establish a corresponding organizational structure, and
cash budget is just the extension and development on the
basis of budget of the financial department. Many
departments think that budget is just the responsibility of
financial departments, so it shall be formulated and
manged by the financial department.
2) The budget has a big deflection in the actual
execution, and the restriction of group budget is small.
The member enterprise often isn't good implement the
provisions of the budget in specific executive, and the
randomness is bigger, and cause group the shortage of
funds. In some degree, it’s caused by that the budget isn’t
timely dynamic update and adjust.
3) The change of cash flow budget is too arbitrary,
and can't effectively support group operating decisions.
when there are large group temporary payments, it’s
usually the group leader after the decider, the related
departments of group modify the budget according to
decisions.
C. The shortcomings of the Cash flow management
evaluation system
Cash flow management evaluation index lack, and the
group often only set absolute index as the main evaluation
in the inspection, which include increase or decrease in
quantity of total cash, balance contrast with previous
years and so on, and set relative data of cash flow balance
contrast with previous year as cash flow budget
implementation analysis basis, so it lack more detailed
cash flow profit, operating performance, the debt
repayment ability and other index.
IV. THE ESTABLISHMENT OF CASH FLOW
MANAGEMENT CONTROL MODEL IN L GROUP
The improved cash flow management processes of L
Group include five aspects contents: cash flow
management organization, cash flow analysis, cash flow
budget management, cash flow risk control, cash flow
management, performance evaluation, in order to
combine cash flow, enterprise organizational with
business activity organically, then achieve to manage and
effectively control cash flow[6].
A. Setting cash flow management organization
The Group set up cash flow management committee
to replace the original financial groups to strengthen the
Group’s cash flow management. It’s necessary to set a
specific organizational framework for the cash flow
management committee to ensure the cash flow
management goals. The framework include four
management control system: cash flow management
committee, cash flow management organization
department, cash flow centralized management
department, cash flow management responsibility
department.
Cash flow management committee is the core
departments of the L Group’s cash flow management, and
it’s directly responsible for the Group’s Board of
Directors. The members is composed by the Group’s
general manager, deputy general manager that responsible
for the financial and each functional department leaders.
Cash flow management committee is responsible for
formulating the group’s cash budget, and developing the
Group’s cash flow management goals according to the
Group’s strategic goal, coordinating the business decision
of the subordinate member enterprise to maintain the
safety of the group cash flow.
Cash flow management departments is located in the
L group’s financial center, that supervise and manage
group cash budget execution under the leadership of the
group cash flow management committee. By comparing
the execution results with the budget difference, find out
the reasons and feedback to the related department.
Cash flow centralized management is L Group and
the relevant department of it’s subordinate enterprises. It’s
responsible for directly managing the cash flow payments
that is related with their own business scope, and initially
reviewing cash inflow and outflow that business
generated. Through centralized management of cash flow,
it made clear the responsibility of the centralized
management departments in the preparation and control of
cash flow and ensure the effectiveness of cash flow
control.
Cash flow management responsibility department
mainly refers to the member enterprises of L Group
subsidiaries. Due to the dual nature of management and
services, each cash flow centralized management may
also be a separate responsibility unit.
B. Cash flow analysis
Cash flow analysis are analyzed mainly through data
indicators in group cash flow statement. Mainly includes
the inflow and outflow of cash flow structure analysis, the
net cash flow analysis, debt paying ability analysis,
earnings quality analysis[7].
1) Cash flow structure analysis
On the basis of the cash flow statement data, cash
flow structure analysis further clarify the composition of
cash income and cash expenses. Cash flow structure can
be divided into cash income structure, cash expenditure
structure and the radio of income to expenditure structure.
Cash flow structure response the proportion of cash
income of the Group’s business activities in total cash
income and the specific composition of the business
income. Cash expenditure structure refers to the
proportion of business cash expenditures in current
outflows, and it reflect concretely which aspect the
enterprise cash use. Inflow and outflow structure analysis
include inflow and outflow analysis of business activities,
inflow and outflow analysis of investment activities,
inflow and outflow analysis of financing activities.
2) Net cash flow analysis
Through the net cash flow analysis, we can draw the
changes of the enterprise management status: if net cash
flow of the enterprises business activities is positive, net
cash flow of investment activities is negative, net cash
flow of financing activities is negative, it shows that the
operations of the group is good, but the enterprise on one
hand pay the debt before, on the other hand continue
investment, so it should be ready to focus on the change
of operating conditions to prevent financial conditions
from deteriorating.
3) Debt paying ability analysis
Through the analysis of corporate assets table data,
we derive the enterprise’s debt paying ability analysis
from the current ratio, debt ratio, debt to equity ratio, debt
ratio of cash flow, debt ratio of operating cash flow, the
sale cash ratio.
4) Earnings quality analysis
The main indicators of earnings quality analysis is
profitable cash ratio, mainly concerning the establishment
of information earnings quality analysis system of cash
flow statement. This ratio reflects the ratio of net cash
flow that generated from the current operating activities to
net profit, namely, net profit put how many net cash flow
generated by business activities as a guarantee.
C. Cash flow budget management
The L Group’s cash budget is not only the objectives
of the Group’s cash management, but also an important
tool for day-to-day management control of the Group.
Group set the overall goal through the budget formulation,
then divide and decompose it as the objectives of
subordinate members enterprise. By monitoring the
budget execution of the subordinate enterprises, the
administrative department of the Group , find out the
difference between the actual performance results and
budget goals and analyze the reasons, then correct them
timely to strengthen Group’s day-to-day management
control[8].
The establishment of cash budget uses initiative
prepared of top-down, bottom-up, up and down
combined. After done, it would be the basic norm of
production and management operation, and achieve
limited control in the implementation process[9].
D. Cash flow operation management
Through analyzing the possibility of various factors
that influence the cash flow, L Group cash flow operation
management uniformly plan and schedule significant cash
payment activities of group, so that the group cash
management can achieve "budget well, scheduling fast,
control tighter, pull quickly" [10]. The basic principle of the
Group’s cash flow operation management is based on the
cash budget. Through managing and controlling cash
inflow and outflow, use the tools of investment and
financing management to adjust the imbalance of cash
flow and achieve the overall balance and stability of cash
flow.
Through the establishment of operational cash flow
dynamic decision model, enterprises draw the flow of
cash flow movements during a certain future, forecast and
plan major cash payments by the likelihood of the various
cash flow elements in the budget period, resulting ensure
the balance of the cash flow management in macro, and
realize the prospective of cash flow management in the
microscopic, in order to better carry out the strategic
planning, investment and financing decisions around the
enterprise operation and investment and financing
activities.
E. Cash flow risk control
Cash flow risk is the possibility that enterprises have
suffered losses, that because an unexpected or control
factors lead to the enterprise does not match the cash
receipts and payments[11]. The main content of the cash
flow risk is enterprise appear cash can't satisfy the
payment requirements, including meet demand, tax
payment enterprise loan payments, personnel salary
welfare and other expenses. It also includes the case of
cash flow problems, that the enterprise can not meet the
payment though has sufficient cash as flow problems.
Whatever business risks appear, it will have a negative
impact to the enterprise, even make the group facing
bankruptcy risk. So managers must accurately forecast
and analyze cash flow risk to avoid enterprise loss, which
is also important to the enterprise stakeholders.
F. Cash flow evaluation
Cash flow evaluation indicators need to be able to
analyze and evaluate cash flow, liquidity, security,
efficiency and growth. Through evaluating cash flow
operating conditions, valuating expected cash flow
management, statically evaluating cash flow management
of a point, achieve to make the right judgments and
decisions to enterprise’s overall financial position,
solvency, profitability and future development.
Specifically, mainly include the following aspects of
content: the liquidity analysis, obtain the ability analysis,
financial flexibility analysis, earnings quality analysis.
Establishing cash flow evaluation system is to judge
the Group’s management performance, assess the Group’s
cash flow management objectives be achieved or not, and
it plays a reference to the future cash flow management
improvements.
V. CONCLUSION
Based on analyzing the L Group’s currently cash flow
management, a general pattern of the L Group’s cash flow
management was constructed in the paper. Through
enhancing cash flow management, enterprise improve the
Group’s cash flow management level and the
competitiveness of enterprises to achieve business
objectives.
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