Tracking Your Cash Flow

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.

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  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
  investments.

• 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.