Cash Flow Isn’t Just Compliance – It’s the Truth Behind the Numbers
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For too many accountants, the cash flow statement is something you sort out last, often after the profit and loss and balance sheet are done. But clients don’t go bankrupt because of profits—they run out of cash.
Section 7 of the IFRS for SMEs makes the importance of cash flow crystal clear: you need to show how cash and cash equivalents moved during the period, split between operating, investing, and financing activities.
This isn’t just for show. Your clients’ funders, SARS, banks, and even your own ethics as an accountant depend on cash being presented honestly and clearly.
The Basics That Get Overlooked
Let’s start with the definition:
Cash equivalents are not any short-term investment you can find. They must be:
Short-term (usually under 3 months),
Highly liquid,
Readily convertible to known amounts of cash,
Subject to insignificant risk of changes in value.
Still lumping money market funds or 6-month FDs in here? That’s not cash. That’s a misstatement.
Also, yes—bank overdrafts can be cash equivalents—but only if they’re repayable on demand and managed as part of a daily cash facility. If not, they belong squarely in financing activities. No exceptions.
Operating Activities: Get the Core Right
This is where many practices go wrong. Operating cash flows aren’t just ‘cash from sales’. They’re the cash effects of your client’s actual trading activity. Receipts from customers, payments to suppliers, wages, taxes (unless clearly linked to investing or financing)—these all go here.
The confusion usually comes in with interest and dividends. Section 7 gives you some flexibility, but the key is consistency. You can treat them as operating, investing, or financing cash flows—just don’t change your mind each year.
Same with income tax—only shift it out of operating if it clearly relates to a non-operating activity, like capital gains tax on an asset sale.
Investing and Financing: Not Just Big-Ticket Items
Cash paid to buy assets? Investing.
Loan repayments or share buybacks? Financing.
Seems simple, but practices often blur the lines—especially when it comes to things like supplier finance, leases, or derivatives.
Section 7 now expects more rigour:
Buying a vehicle on lease? That’s a non-cash investing and financing transaction—disclose it, but don’t put it in the statement.
Taking out a supplier finance facility? Depending on the terms, that cash outflow might now be classified as financing, not operating. This can dramatically affect how lenders see your client’s working capital position.
The Supplier Finance Trap
New requirements under 7.19B and 7.19C make it clear: if your client uses a finance provider to settle suppliers early (and they pay back the provider later), it’s not business as usual.
You must:
Disclose the terms,
Show which liabilities are part of the arrangement,
Disclose which suppliers have already been paid by the finance provider,
Explain the difference in payment terms between normal payables and supplier finance ones.
And importantly, cash classification might change—from operating to financing.
Foreign Currency? Don't Fake It
When cash moves in a foreign currency, you translate it using the exchange rate at the date of the transaction. Don’t just use a year-end rate or some average that “feels fair.”
Unrealised gains and losses don’t belong in the cash flow—but their effect on cash balances must still be shown in the reconciliation between opening and closing balances.
New Requirement: Reconcile Your Liabilities
Section 7.19A introduces a requirement that’s often missed in smaller practices:
You need to show how financing liabilities moved from beginning to end of the period—even if some of those movements were non-cash.
This includes:
Actual cash flows (borrowings or repayments),
Changes due to FX movements,
Changes in fair value or due to acquisitions.
Think of it as a shadow ledger of your client’s funding activity.
Non-Cash Transactions? You Can’t Hide Them
Just because they’re not in the statement doesn’t mean they don’t matter.
Common examples:
Buying assets via lease,
Debt-to-equity conversions,
Equity issued in exchange for assets.
These must be disclosed elsewhere in the financials—don’t assume they get lost in the notes.
What You Need to Tell Your Clients
If your clients are using supplier finance or restructuring debt, their cash flow story is changing—often in ways they don’t realise. You, as their accountant, must:
Get the classification right, or risk misrepresenting liquidity;
Disclose correctly, or face credibility issues during reviews or audits;
Explain the numbers, so clients understand how their cash flow really works.
What Accountants Are Getting Wrong
✅ Classifying interest and dividends inconsistently
✅ Failing to disclose non-cash transactions
✅ Overstating cash by including restricted or non-liquid assets
✅ Misclassifying supplier finance as trade payables
✅ Using foreign exchange shortcuts instead of actual rates
✅ Ignoring the financing liability reconciliation
What They’re Getting Right (Mostly)
✅ Keeping operational and investment flows separate
✅ Applying the indirect method consistently
✅ Understanding the difference between net profit and net cash flow
But to really stand out, CIBA accountants need to do more than just comply—they need to use cash flow as a tool for advisory, planning, and performance analysis.
In Closing
Cash flow doesn’t lie. Profits can be dressed up—but cash tells the real story. If you're preparing SME financials, don’t relegate the cash flow statement to the afterthought it’s been in the past. Understand it. Explain it. Use it. That’s how you protect your clients—and get paid like the trusted expert you are.
Join CIBA for a CPD on Concepts and Pervasive Principles under the IFRS for SMEs here.
Still Don’t Know What Qualifies as an Asset? Time to Sort That Out.
Concepts and Pervasive Principles under the IFRS for SMEs
📅 Originally presented live on 24 March 2025
🎥 Now available on-demand
🕒 3 CPD Units | Accounting | Channel 1: Compliance
Let’s be honest—most accountants were never properly taught the why behind IFRS for SMEs. And without those basics, you’re just ticking boxes, not building real insight.
This session breaks it all down—no fluff, no corporate waffle—just the fundamental stuff that helps you get it right (and stay out of trouble with SARS or your client’s board).
What’s in it for you?
✅ Understand why we even prepare financials in the first place (and how to explain that to clients)
✅ Grasp what actually counts as an asset, liability, income or expense—no more grey areas
✅ Know when and how to recognise and measure items (so you don’t overstate or understate anything)
✅ Use these principles to get the basics right before the standards get technical
And yes—there are practical examples and case studies to help you apply it immediately.
If your goal is to:
Stay compliant (with fewer sleepless nights),
Explain financials to clients like a pro,
Or just sharpen your foundations—
Then this one’s for you.
🔗 Access the recording here now and claim your CPD units.
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