Cash Flow Analysis

The Cash Flow Analysis is one of those key reports that is often overlooked but holds such great information.  Often when I ask to see a company’s financial statements, I am provided with only the Income Statement.  But that is just one of the three reports needed to understand your business.  In addition, you will need to review the balance sheet and the statement of cash flows.

It is entirely possible to have a positive net income but be cash poor.  This is often the case with companies in growth mode.  Cash is often reinvested in the company to drive sales and needs to be managed very carefully.  There are so many items that affect cash but do not appear on the Income Statement so it is important to monitor the movement of cash along with your income and balance sheet.

The statement of cash flows will show you how much cash you are generating from operations. You will quickly be able to see if your operations are sufficient to meet your cash needs or if you are instead doing this by stretching out accounts payables or borrowing monies or withholding shareholder distributions.

The statement of cash flows will also quickly show you how much cash is needed to pay down debt or tax distributions and any funds required for asset purchases and CAPEX requirements.

 Because so many items can affect cash that are not reflected in the income statement, it is very important to forecast your cash in addition to your income in the upcoming year.  

Doing this by month will allow you to predict when you might be tight on cash and whether it will be necessary to access additional cash.

If the company will need additional cash there are many options, but larger cash needs typically come with varying degrees of discomfort or costs to obtain.  

That is why being prepared and having enough time to manage your cash needs is critical and the best reason for making sure you are analyzing your cash flow regularly.