Decentralized Organization & Statement of Cash Flow

Decentralized Organization

&

Statement of Cash Flow

Soundar ya Subburaj

• Decentralization is a term which handles organized

delegation of authorization in most of all organizations at all levels of administration

• The top-level management takes care of all

important companywide activities such as designing the structure, planning policies as well as making major decisions.

• The activities related to other decisions and liability

are allocated accordingly to lower and middle level management (Bach, 2017).

• It encourages the employees by giving chance and

showing trust to make the independent decisions and accountability.

• In other words, decentralization is the strategy of

having very few designations and power at the top and expanded sovereignty at the bottom.

What it is ?

Centralization : • All the major decisions are taken at the top of the

management by giving power to senior management.

• The communication is aligned vertically • Is suitable for small businesses as company owner

is accountable for company business • There are less chances of mistakes as all business

processes and operations are already in place.

Decentralization : • Middle and lower-level management are equally

responsible in terms of power and decision making • It allows more open and free communication

(O’Grady, 2019). • Suitable in large organizations and many individuals

are responsible in decision making • It is more flexible and allows improvement and

individual belief processes.

Advantages of Decentralization

• As the decision-making process is distributed through all level, it encouraged employees to take initiative and involve in all the processes which will assist them to be best employees for future.

• It improves quality of work by coordinating work among

all levels and helps to keep all activities on track.

• No wastage of assets or energies as all the activities are clearly centered on what needs to be done.

• Lessens top level managers of information and decision

overload.

• Is highly useful to deal with emergency conditions like cutting costs, handling the changed government policies, or using resources tactfully.

Disadvantages of Decentralization

• Conflict : Due to decentralization, divisional heads are always under pressure to gain the profit irrespective of any condition which may lead conflict among different divisions.

• Cost : As decisions and operations are taken by each

individual department, there is unnecessary extra cost is carried out by them on marketing, skilled employees and procuring.

• Training : sometimes decentralization mandates training options for the employees which could be extremely cost effective and time taken.

• Lack of decision : in decision making process, lower- level management may take decisions just considering short term agenda without analyzing the long-term goals (Bach, 2017).

Organizational approach towards decentralization

• Decentralization approach is best suitable for the multinational companies that are trying to expand in various product categories or trading in multiple markets where senior management delegate the decision-making responsibility to the lower management (O’Grady, 2019).

• Fast food franchise such as Subway, BurgerCity and

Coco are the best examples of decentralized organizations where each franchised restaurant in the chain are responsible for operating their restaurant in their own way.

• Another well-known example is Johnson center

that has over 300 departments running as an individual.

Objective of Statement of Cash flow

• The cash flow statement is a fiscal statement that encapsulates entire amount of cash along with cash equals that comes and leaves in the organization.

• It helps the organization to evaluate how well they are overseeing their cash position in terms of how properly they can produce cash to fund and pay liability commitments.

• Since 1987, it is one of the important parts of organization’s financial report and accompanies income statement as well as balance sheet (Broome, 2004).

• Cash from financing activities, operating activities and investing activities are major elements of cash flow statement

Types of cash flows

Operating Cash flow : • Money that is produced and

consume by businesses on day-to- day trading activities like recurring business expenditures, sales of product.

• Examples : Utility bills, Rent or

lease payments, fines

Investing Cash flow : • Money engendered and paid on

from machinery equipment, property, long term assets and market underwritings over the reporting period.

• Example : Procurement,

Outstanding loans

Financing Cash flow :

• Money transactions between company and their shareholders, creditors, and proprietors (Carlson, 2020).

Steps to prepare Statement of Cash flows

• Step 1 : Verify net cash flow using operating pursuits by converting net income

• Step 2 : Use Investing activities to verify net cash flow that involves received and paid cash for noncurrent liabilities

• Step 3 : Prepare cash flow from financing activities by presenting

cash activity for noncurrent obligations and proprietors’ parity (Broome, 2004).

• Step 4 : Merge change in cash over the period • Step 5 : Represent financing transactions and noncash investing.

Importance of Statement of cash flows

• The statement of cash flow is one of the important managerial accounting as it gives clear picture of the company cash.

• It is significant gauge for a company of long-term goal, power and productivity and assists

to analyze company’s position in terms of cash to pay the payments. • Generally, for small companies profit and loss report is enough and hence hardly creating

cash flow statement (Carlson, 2020). • For any successful business, cash should always be sufficient to pay expenses, bank loans,

taxes as well as to buy new machineries or equipment with the help of cash flow statement.

Example :

Star Scanning Services Statement of Cash Flows

For the year ended 12/31/2018

Cash Flow from Operating Activities:

Cash received from clients $150,000

Cash paid to investors (48,390)

Cash paid for expenditures (80,000)

Net Cash provided by Operating Activities $21,610

Cash Flow from Incenting Activities:

Cash paid to purchase extra tools ($19,500)

Net Cash provided by Incenting Activities ($19,500)

Cash Flow from Financing Activities:

Cash received from owner $60,000

Cash received from supplier 38,000

Cash paid for bank interest (25,000)

Net Cash provided by Financing Activities $73,000

Net Increase (Decrease) in Cash for the Year $75,110

Add: Cash – 1/1/2018 $9,500

Cash – 12/31/2018 $84,610

References

Bach, O. (2017). Centralized or decentralized, that is the question – management kits: Making management learning work. Retrieved from https://www.managementkits.com/blog/2017/4/19/centralized-or-decentralized-that-is-the-question

Broome, O. W. (2004). Statement of cash flows: Time for change! Financial Analysts Journal, 60(2), 16–22.

https://doi.org/10.2469/faj.v60.n2.2605 Carlson, D. (2020). A guide to cash flow statements. Retrieved from https://money.usnews.com/investing/investing-101/articles/a-guide-to-cash-flow-statements

Carlson, D. (2020). A guide to cash flow statements. Retrieved from https://money.usnews.com/investing/investing-

101/articles/a-guide-to-cash-flow-statements O’Grady, W. (2019). Enabling control in a radically decentralized organization. Qualitative Research in Accounting & Management, 16(2), 224–251. https://doi.org/10.1108/QRAM-07-2017-0065