Getting the Most From The Cash Flow Statement

Donating to Legitimate Charitable Organizations
August 18, 2015
Safe Harbor Expense Level Raised
December 4, 2015
Show all

Getting the Most From The Cash Flow Statement

Getting the Most From The Cash Flow Statement

Cash is king.  It doesn’t matter what business you’re in, when you’re out of cash, your business is in trouble.  So having a handle on your cash – knowing where it’s coming from and where it’s going – is important.  That’s what makes the Cash Flow Statement such a powerful tool.

The Cash Flow Statement is Broken into Three Distinct Parts:

1. Operations,

2. Investing, and

3. Financing

The first section, operations, should be the most important to established companies.  Banks and sureties want to see cash generated by operations.  Owners like it too.  This means that the company can pay off loans, buy new equipment and make owner distributions.

When a company generates cash flows from operations a majority of the time, it is a great sign of health.  Banks will be more likely to lend and sureties will feel good about bonding their projects, as they know there will be cash to pay obligations.

An outflow of cash from operations during a growth year won’t worry banks and sureties.  However, it is a cause for concern in non-growth years.

The second section, investing, generally lets readers know how much money the owners are putting into the company for the future.  The most typical ways are by purchasing equipment and other fixed assets and long-term investments (such as mutual funds).  Readers expect that most years there will be an outflow of cash for investing.

The last section, financing, shows the readers two main things – how much debt the company has taken on or paid off, and how much cash has been distributed to the owners.  During growth years, it is not uncommon for cash to be generated by financing as companies take on debt.  However, banks and sureties want to see the cash generated by operations paying off the debt in the following years.

If you have wondered why your accountant gives you the Cash Flow Statement as part of your financials, or if you don’t currently receive a Cash Flow Statement, let us know.  We’d love to sit down with you and show you what you can learn from this extremely informative statement.