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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.


By Marty McGhie

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 (marty@ferraricolor.com) is VP finance/
    operations of Ferrari Color, a digital-imaging center with Salt
    Lake City, San Francisco, and Sacramento locations.


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