This is a great time of the year to talk about “Cash Flow”. Many of you are great at growing sales, and managing your crews- but if you do not manage your cash, you will find the business is less than a joy. These can also be utilized as a predictive tool once you have some historical data on your AP and AR.
We have had discussion of depreciation and it’s effects on your books and how your bankers will look at your business. In my opinion, the cash flow report is the one report that matters most to small business owners. Cash flow- or lack thereof- is what kept me awake nights. It took me away from what I wanted to be doing, and focused me on what I had to be doing to meet payroll and other obligations.
Here is a Wikipedia graph on the “indirect” statement of cash flows. There is also a “Direct” method, which requires a bit more work to get to the end result, and for most small and midsize firms is not necessary (IMHO)
|XYZ co. Ltd. Cash Flow Statement
(all numbers in millions of Rs.)
|Period ending||31 Mar 2010||31 Mar 2009||31 Mar 2008|
|Operating activities, cash flows provided by or used in:|
|Depreciation and amortization||2,790||2,592||2,747|
|Adjustments to net income||4,617||621||2,910|
|Decrease (increase) in accounts receivable||12,503||17,236||–|
|Increase (decrease) in liabilities (A/P, taxes payable)||131,622||19,822||37,856|
|Decrease (increase) in inventories||–||–||–|
|Increase (decrease) in other operating activities||(173,057)||(33,061)||(62,963)|
|Net cash flow from operating activities||13||31,799||(2,404)|
|Investing activities, cash flows provided by or used in:|
|Other cash flows from investing activities||1,606||17,009||(571)|
|Net cash flows from investing activities||(204,206)||(58,425)||(79,231)|
|Financing activities, cash flows provided by or used in:|
|Sale (repurchase) of stock||(5,327)||(12,090)||133|
|Increase (decrease) in debt||101,122||26,651||21,204|
|Other cash flows from financing activities||120,461||27,910||70,349|
|Net cash flows from financing activities||206,430||33,283||83,311|
|Effect of exchange rate changes||645||(1,840)||731|
|Net increase (decrease) in cash and cash equivalents||2,882||4,817||2,407|
Even if you are not providing this report to your bankers, be assured they are creating it from your other documents, and they are basing a lot of their opinions of your ability to manage your company on it. The job of an analyst isn’t to look at your assets to determine if there is enough collateral to cover the loan, they want to know if you have the cash flow to be able to pay them back, within terms -and not create more work for their collection department. Asset based lenders are generally not folks you want to be doing a lot of business with.
Even if a small business owner doesn’t look at this report, there aren’t others that provide a better barometer of how rough the water may get. You may have great receivables, but you can’t make payroll with them. If you are a new business, look at this report often, perhaps weekly. You will also want to keep this report on your radar if you are experiencing great growth rates (15% or higher as an example) to ensure you will maintain the liquidity you need to operate from cash from operations. If you see the cash needs trending beyond what you will be able to manage, get on top of it early. Waiting until the last minute, and you may find yourself making decisions out of desperation rather than diligence.
Have a great week. See you next Monday.