Don't Overlook the Cash Flow Statement
One of the most important numbers that business owners and their stakeholders should know is the Company’s cash flow from operations, which is often overlooked in lieu of the income statement and balance sheet numbers. Being able to internally generate sufficient cash is key to maintaining a healthy business. A Statement of Cash Flows serves as a map that tells where cash came from and where it went, and is a crucial planning tool for any business’s long term success.
In addition to reporting cash flow from operations, the cash flow statement can highlight other key factors to consider in a business's strategy.
• A cash flow statement shows if a business is running out of money, even if it is profitable at the same time. Fast growing businesses often show a net income but have their cash tied up in accounts receivable or rely too heavily on bank financing.
• A cash flow statement will tell if the owners are taking too much money out of the business, which is not something you would see on the income statement. Distributions should not exceed cash flow from operations.
• A cash flow statement makes clear how much money was used to purchase property and equipment, another thing you won’t find on the income statement. It’s important to know the cash impact that fixed asset investments have, since net income can be significantly affected by depreciation and amortization.
• A cash flow statement can tell you how loan payments affect cash in the bank. While interest payments are reported on the income statement, principal payments are not; both are reflected on the cash flow statement. Knowing how much cash is needed every month to make monthly loan payments can help with better planning.
