“Our Income Statement shows that we are lucrative, but how come our company is definitely strapped for cash? ” This is a common issue I get from managers and business owners alike. And I always inform them that the Cash Flow Statement is one place to look for answers. This financial declaration is one of the reports mostly overlooked especially by small business owners. Most of the time, they are not actually aware that this financial statement is one of the basic reports they should be getting off their accountants.
The Cash Flow Statement shows the actual cash generated by the business for a given period. It is primarily composed of three main categories:
Money generated from or used in operations
Investments made by the company
Cash Flow from Operations
This group revolves around four activities:
Selections from customers
Payments to providers
Other operating cash outflows for example sales & marketing and administrative expenditures and interest payments
Cash taxes payments
A positive net cash flow through operations means that the company’s core company operations is able to sustain itself : the collections from customers are usually enough to cover the day-to-day requirements of the business.
A negative net income from operations means that the cash inflows from the company’s operations are not sufficient to cover the daily costs and expenses. This is quite expected regarding companies who have just recently started operations because efforts are still focused on product sales and marketing to build customer bottom. But management should always work to improve the net cash flow from operations to make sure investors that management is effective in controlling the financials and functions of the business.
Cash Flow from Investing Activities
This section usually shows the amount of cash spent by the company upon capital expenditures, such as new factory equipment or business expansions.
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This section also includes other monetary assets (such as money market funds) and acquisitions of other companies.
There is a negative net cash flow through financing activities if the company put money into investments during the time period. It is good to see a company re-invest some of its profits back into the business enterprise to cover depreciation of its fixed resources and/or to finance business development.
Conversely, the net cash flow from funding activities is positive if the corporation liquidated or sold some or all of its investments. This may occasionally be required to generate funds to augment the operational requirements of the business. Liquidating investments is better compared to borrowing money from the bank or other creditors because the company will not have to pay interests.
Cash Flow from Financing Activities
It shows the outside financing activities performed by the company. The cash inflows from financing activities pertain to extra capital from investors or from borrowings from the bank or other creditors.
The cash outflows from funding activities, on the other hand, result from repayments associated with bank loans and other borrowings and/or cash dividend payments given to investors.
Effective Cash Management
A big part of in operation is managing the funds. You have to make sure that your company’s cash inflows are timely and enough to protect your cash outflows. Your company will be attractive to potential investors when they see that your own over-all operations produce adequate free cash flow (FCF). Free cash flow shows that your company has the ability to pay debts, yield dividends and facilitate the growth of the business.