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Business + Management: Marty Mcghie

Tracking Your Cash Flow

Producing and using a statement of cash flow for your business.




In small business, we often talk about factors like sales, net profits,
debt structure, capital expenditures, and other important
indicators in our businesses. When all is said and done, however,
we live or die with our cash flow. To be sure, all the other factors
do contribute to either positive or negative cash flow”?but in
order to survive, we must analyze each of these critical areas
within the context of how it affects cash flow. That's why a statement
of cash flows can be
so useful.

The first step in using
this tool is to actually produce
one. Whether you are
generating your financial
statements in-house, or
you're relying on an outside
accounting firm to produce
your statements, make
sure you get a monthly
statement of cash flows,
preferably at the same time
you receive your monthly balance sheet and P&L statement. It
may cause some extra work for your accounting personnel, or
cost you a little more each month, but you'll find that it will be
well worth it.

Three sections
A statement of cash flows comprises three separate sections:
cash flows from operating activities; cash flows from investing
activities; and cash flows from financing activities. Let's take a
look at each section; I've provided a sample statement at right.

  • Cash flows from operating activities: This section begins
    with the net income or loss. Because net income is not a direct
    reflection of cash flow, some adjustments need to be made to
    net income”?primarily adding back in all non-cash expenses
    such as depreciation and amortization expense. This, then, gives
    an accurate accounting of cash generated from net income.

    Next, under this same section is a detail of changes
    in current assets and current liabilities from the balance
    sheet. Increases in current assets decrease your cash, while
    decreases in current assets increase your cash; the opposite
    is true for current liabilities.

    A few examples: If your business experiences an increase in
    the accounts-receivable balance during the month, you have
    converted sales into additional accounts receivable, which
    consumes cash and will reflect a decrease in cash on the statement.
    If your company's inventory balance decreases during
    the month, this will be reflected as an increase in your available
    cash”?you have utilized inventory that was paid for in a
    prior period, thus increasing your cash during the month.


    On the opposite side of the ledger, current liabilities work
    the other way. For instance, if your accrued payroll balance
    has gone up from one month to the next, you have experienced
    an increase in available cash”?instead of paying out the cash,
    it has been accrued and will be paid in the subsequent period
    (at least it better be). These changes in current assets and
    liabilities are netted against the net income (with adjustments
    discussed), giving you a total of net cash provided by/(used
    by) operating activities.

  • Cash flows from investing activities: This section deals primarily
    with the acquisitions and dispositions of capital assets.
    It's important to note that we are only accounting for the actual
    cash used in capital investments or cash received from the sale
    of equipment or other long-term assets. If, however, the equipment
    is financed, it will be documented in the third section.

    This section provides useful analysis of the means by which
    you are paying for your capital additions. Seeing how your cash
    is spent on assets during the month can assist you in making
    future decisions on what to buy and how to buy it. This second
    section would also include any interest earned from long-term

  • Cash flows from financing activities: This portion primarily
    accounts for cash paid out on long-term debts. Because the
    interest expense is already accounted for in your profit-andloss
    statement, this portion of the statement only documents
    the principle payments on your long-term debt or lease obligations.
    Cash received from borrowing also would be indicated in
    this section. If you are collecting on a long-term note receivable,
    the cash proceeds (again excluding interest revenue)
    would be documented here. Plus, this can be a valuable tool
    when determining how much cash from your business is being
    used to service your debts.
  • Where to find the cash
    At the bottom of the statement of cash flows is a total of these
    three sections, producing either a net increase or decrease in
    cash during the period. This number is added to, or deducted from,
    your cash balance at the beginning of the period, resulting in your
    ending cash balance, which ties out to your balance sheet.
    Although it's just a brief overview of this financial tool, I think
    you can clearly see the value of regularly reviewing the cashflow
    statement. The next time you find yourself asking that
    never-ending question”?”Where did all our cash go?”?you'll
    know where to look for the answer.

    Marty McGhie ([email protected]) is VP finance/
    operations of Ferrari Color, a digital-imaging center with Salt
    Lake City, San Francisco, and Sacramento locations.




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