Virtual Bean Counters Cash Flow

Statement of Cash Flows

The Statement of Cash Flows is an important part of analyzing any business, providing the reader with insights into the practicality of the business and its ability to sustain itself with positive cash flow. The information presented in the statement of cash flows is not explicitly present in the balance sheet or the income statement, but rather uses the balance sheet, income statement, and other selected transactional data to show the sources and uses of cash in your business. This is why the statement of cash flows is so important, it will help explain how your business acquires and uses cash, and answer the common entrepreneur’s question of “if the income statement is telling us we earned a profit, where the heck is all the cash?!” The statement of cash flows will shed some light on the subject, providing insights into sources and uses of cash that are not always obvious from the income statement or balance sheet.

The statement of cash flows reports on the cash generated and used during a specific fiscal period (month, quarter, or year), in the following categories:

1. Operating activities
Converts the net income on the income statement from the accrual basis of accounting to net cash flow from operating activities. In other words, net income is adjusted for items that affected reported net income but didn’t affect cash. So, noncash changes in the income statement are added back to net income (depreciation, etc) and cash changes in short term balance sheet accounts are added or deducted – i.e. increases or decreases in accounts receivable or accounts payable are either a source or use of cash.

2. Investing activities
Reports the purchase and sale of long-term investments and property, plant and equipment, and other long term balance sheet accounts. For example, the purchase of long term assets (equipment) do not show up on the income statement, but it is still a use of cash. If the business secures new financing and borrows funds, this is another transaction that does not show up on the income statement but is a source of cash funds.

3. Financing activities
Reports the issuance and repurchase of the company’s own bonds and stock and the payment of dividends.


So “where did all the cash go!?”

The Cash Flow Statement should help you answer the question, starting with net income and then showing the affect of short term balance sheet items like inventory, receivables, payables, and other accruals. The point is to determine if operating activities are consistently producing positive cash flow over time. It is also necessary to understand how debt, long term asset purchases, and shareholder activity are affecting cash flow.

If you have never studied the cash flow statement or been coached on its meaning it will take some time to start to comprehend that cash flow is not just a product of income statement profit, and how cash flow is affected by balance sheet line items. In order to gain some perspective you should be reviewing the cash flow statement monthly to start to spot trends. Regular review will start to show you how managing your assets and liabilities can have a huge impact on cash flow. Such things as inventory control (lowering the $’s tied up in unnecessary inventory on hand), accounts receivable management (reducing the number of days $’s are tied up in receivables), and accounts payable management (taking advantage of terms and making sure all vendor credits are realized) are all part of cash flow management. We will start to explore the details of cash flow management and improving cash flow in future blogs.

In our opinion the Cash Flow Statement is neither more important nor less important than either the balance sheet or income statement. It is however the most important when it comes to assessing the timing, amount and predictability of future cash flows.  Hopefully your finance division is competent with cash flow statements and is helping you understand how every aspect of your business is affecting cash flow. At Virtual BeanCounters one of our primary goals is to coach our entrepreneur clients on how every decision they make will affect cash flow. We all know Cash is King, and clearly understanding the cash flow of your business is the only way to have a clear plan for growth and long term success.

How has your cash flow been lately? If it has been a little tight, have you been able to pinpoint all the causes? Has your finance department been able to craft a plan to improve cash flow? We would love to hear your comments!


**At Virtual BeanCounters, Inc. we work with our business owners during the first 30 days to make sure they have a clear understanding of what the basic financial statements are and how to read them. Next we build on that basic understanding, adding more reports and more thorough analysis, so that eventually the business owner is spending a few minutes every day reviewing the appropriate financial reports to help them improve profits and cash flow.  One of the best tools to understanding and improving cash flow is the Cash Flow Statement. Use the financial reports to measure your business. What we measure we will manage, and what we manage we will improve!