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Tracking Your Cash Flow

(December 2005) posted on Wed Dec 21, 2005

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

click an image below to view slideshow

By Marty McGhie

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.