Cash Flow Reporting in the Era of Financial Digital Transformation

Written by Trovata Team
May 25, 2021

Cash flow reporting was introduced as a financial statement in the 18th century. The idea behind its introduction was to capture the cash transactions of the Dowlais Iron Company. The manufacturing and logistics enterprise had reported profits in its annual financial statements but could not free up cash to purchase a new blast furnace. 

An explanation for the enterprise’s cash challenges was sought by its stakeholders, which led to the creation of the first cash flow report. The Dowlais Iron Company’s cash flow report explained how a profit could be generated despite cash flow limitations.

The Evolution of Cash Flow Reporting Processes from Industry 1.0 to 4.0 

The evolution of cash flow reporting processes has its roots in the technology advancements that occurred since the first industrial revolution. The introduction of the initial cash flow report during the 1st industrial revolution required the use of pen and reams of papers to capture financial transactions. The completely manual process continued through the 1st and 2nd industrial revolutions as finance professionals had nothing else to work with.

By 1971, cash flow reports had become official documents that showcased an organization’s cash transactions within a specified duration. The Financial Accounting Standards Board (FASB) officially defined the rules for creating cash flow reports in 1973. 

Finance professionals were required to calculate expenses related to cash flow from operations, cash flow from investing, and cash flow from financing. These calculation indexes meant thousands of cash transactions must be recorded, aggregated, and analyzed to capture the cash position of an enterprise.

The standardization of cash flow reporting was finalized during the 3rd industrial revolution where electronic computing resources had been invented. Thus, cash flow reporting calculations were executed using pocket-sized calculators, invented in the 1970s. Data collection was still a manual process.

Finance professionals were still expected to manually capture transaction data and handle the aggregation process by hand. The computers of the ‘70s were equipped with powerful calculators but with limited storage capacity and severe software limitations. Windows Office suite of tools will not be released until 1990, which means utilizing Excel sheets to aggregate or store transaction data was not available during the 3rd Industrial revolution. 

The coming of the information age in the 20th century introduced the widespread use of information technology solutions to conduct economic activities. By the late 90s, desktop computers were equipped with enough storage to capture large data sets, and a cash flow reporting format was developed by SWIFT. The MT940 was designed to capture and transfer end-of-day bank account statements to the requesting party. 

MT940 brought automation to the data collation process, which reduced the manual labor associated with calculating daily cash flow transactions. The respite of a data collection process and increased computing power changed the cash flow reporting processes for the better. With improved technology, the manual labor associated with cash flow reporting was reduced by approximately 40%. 

Industry 4.0 focuses on automating manual processes across industrial sectors, including the finance, banking, and treasury industry. The tools tasked with the industrial automation process were tagged as digital transformation solutions. These advances in information technology included cloud computing, machine learning, open APIs, and mobile applications.

The digital transformation of financial reporting that came with the 4th industrial revolution has introduced the potential for a fully automated cash flow reporting process for the first time. 

Cash Flow Reporting Utilizing Digital Transformation Solutions

The introduction of computing resources and MT940 specifications brought a level of automation to cash flow reporting. Despite these introductions, collating daily data across multiple accounts to make an annual report was still primarily a manual process. Finance professionals still had to put in long hours to create cash flow reports, and the repetitive, time-consuming process also led to accounting errors. 

The integration of digital transformation solutions to automate cash flow reporting reduces the manual labor and human-related errors attached to the process. The solutions digital transformation provides include: 

  • Open Banking APIs – APIs deliver a data-collection pipeline across multiple banks and accounts. With open-banking APIs, third-party applications can access end-of-business transactions to collect and aggregate transactional data. The collation process is entirely automated, and it occurs on request, thus eliminating hours of manual labor from the cash flow reporting process. 
  • Machine Learning and AI – The 4th industrial revolution runs on capturing accurate data and analyzing captured data. Finance professionals can leverage data analytics solutions such as cash management platforms that utilize machine learning to automate data analytics. Thus, a treasurer can provide the cash position of an enterprise to stakeholders in real-time without having to wait for traditional audit cycles. 
  • Scalable Computing Resources – Expanding business activities generate more transactional data, which must be integrated into cash flow reports to ensure accuracy. Cash management apps that leverage cloud computing provide scalable resources for finance professionals to work with. Finance professionals no longer have to worry about the volume of cash transactions that must be analyzed when creating cash flow reports or forecasting. 

Embracing Automation Technology

The digital transformation of cash flow reporting has firmly relegated the days of the abacus, reams of binders, and manual data collection processes to the past. Finance professionals can now leverage automation to simplify aspects of the job description to finally achieve a healthier work-life balance. 

Dive into our Trovata Platform Data Sheet to learn how Trovata delivers automated, data-rich, real-time insights into your company’s cash flows, empowering your team to make faster and better-informed business decisions.

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