Understanding the Cash Flow Statement

Reading Cash Flow Statement should be exciting and enjoyable.

The Cash Flow Statement is the least understood and the most important of all; Cash is King. This Statement shows how cash moves in and out of the organization over a particular period. It provides insights into the organization's cash position and how it sources and uses cash. The Cash Flow Statement is divided into operating activities, use of working capital (Current assets and Current liabilities), and financing activities.

realCFO believes this is the most helpful statement for business leaders. Understanding and providing insight from the cash flow statement is critical. When did you last review the cash flow with your bookkeeper/CPA?

The number one question for realCFO is, What is going on with cash? The answers are right on the Cash Flow Statement if you review it.

Steve had a PL loss (operating activities) of ($16,498) but has only consumed ($13,295). How did this happen? Accrual accounting is why. The PL tells you what occurred in each period, and the BS allows for the timing of the cash transactions. Steve generated $3,603 from working capital (primarily from AR), then paid down his Note Payable (financing activities) by ($400), which gives us a difference in cash of $3,203 from net income.

realCFO has given Steve two recommendations:

1.    Increase billable hours on the PL.

2.    Sell excess merchandising inventory on the BS.

If Steve follows the recommendations, he will see an improvement in cash flow.

Let’s look at Steve’s cash flow statement and discuss what to expect when Steve implements the two recommendations.

The Runway in months* is the number of months before he runs out of cash without any changes to his business. Selling off excess merchandise inventory sooner than later will give Steve a longer Runway to get his billable hours up, a more challenging task.

Cash/Net income Ratio** is the difference in monthly cash flow vs. the net income. Steve’s ratio is less than one year to date, indicative of a growing company. One-to-one would be a stable company without growth. Anything over one would be Cash Cow or a dying company. Understanding your business and what to expect in the cash flow is critical to driving the success of the business goals.

What is your Cash Flow telling you? 

I look forward to helping you; let me know what you think in the comments below, or for a more personalized review, schedule an appointment with me here.