Why Cash Flow Matters

Why Understanding Cash Flow Matters.

Why You Should Care About Cash Flow

Welcome/Thanks for coming back to blog #4 in the series.

What is a cash flow statement?

Understanding Cash Flow: A cash flow statement is a regular financial statement telling you how much cash you have on hand for a specific period, where it has come from and where it has gone. I call a Cash Flow statement the tattle tale of the business because it tells anyone who can read it where your money came from and what you did with it. It is one of the three most critical financial statements to ensure you have enough cash to operate your small business. Along with balance sheets and income statements.

A cash flow statement is divided into three main parts:

  1. Cash flow from operations – the sum of cash generated from sales and cash spent on operations
  2. Cash flow from investments – the flow of money spent and received when assets or large items are purchased and sold
  3. Cash flow from financing – cash received from or paid back to lenders and investors, and cash put in or taken out by the owner.

(In my book, ‘The 7-minute conversation’ I teach how to read Cash Flow Statements in less than 15 seconds using a technique I call the Cash Flow Activity Pattern).

Why cash flow statements matter

A cash flow statement provides you with an understanding of how your business is being run. By looking at your cash flow statement, you can determine whether you are able to cover expenses such as bills and employee salaries. Moreover, it identifies the extent to which you are dependent upon loans to meet your financial obligations. Reports such as these can be used to create budgets and resolve cash flow issues. Furthermore, they are useful to potential investors, since they provide information regarding the potential profitability of your business.

3 reasons why a cash flow statement is important

Cash flow statements can help businesses navigate the need for positive cash-related activity. Here are three reasons why a cash flow statement might be useful for your company:

  1. Insight into spending activities
  2. Short-term planning / long-term planning
  3. Ability to analyze cash planning

Cash flow statements provide companies with insight into expenditure activities, allowing them to quickly determine when they need to make principal payments to creditors. You also see the cash flow for inventory items that otherwise are not noted in other financial statements.

Cash flow statements are especially useful to companies when it comes to short-term planning cash flow as the statements can help financial managers plan for the long term. All companies must stay solvent to avoid bankruptcy and meet obligations, such as paying wages, operating costs and more. Cash flow statements provide a detailed report on how much cash a business has on hand at a given time. This statement helps financial managers understand where money is being derived from and provides them with the ability to project cash flow in the near future and keep track of spending to meet specific, short-term goals and effectively plan and strategize for the long-term.

Businesses create cash plans in order to manage their cash and ensure their businesses succeed. Nonetheless, businesses may not be able to execute cash plans perfectly or meet the objectives identified during planning periods. Cash flow statements can be used by companies to evaluate whether or not their cash planning was effective. Additionally, they can also be used to compare projected cash flow numbers with actual cash flow results. Companies can use this information to make more accurate projections in the future.

The importance of the statement of cash flows
In addition to providing direct information regarding how company funds are being utilized, the statement of cash flows can provide insight into the company’s growth strategy. An overreliance on bank financing, too many loans to others, or excessive investment can be interpreted as an indication that the company is over-reliant on bank financing. Furthermore, the cash flow statement will often provide insight into these factors before they show up on the company’s balance sheet.

Alternatively, the statement of cash flows can be used to attract new investors by demonstrating the company’s financial health and sound management.

In conclusion, both small and large businesses alike benefit from cash flow statements as they enable them to make better-informed decisions regarding their daily operations.

If you feel, want or need to understand more regarding Cash Flow here are 4 ways Mike can help you improve the Cash Flow in your business.

  1. Grab a free copy of my book:

In The 7 Minute Conversation, you’ll learn how to analyze any company’s financial statements in 7 minutes or less. It includes a super valuable lesson on controlling expenses. — Download Here.

  • Join the Clear Path To Cash – Mining Your Business For Hidden Cash Facebook Community:

This is our new Facebook community where business owners who are using the concepts taught in The Clear Path To Cash can share lessons learned and receive advice from my team and other members of the community. — Join Our Facebook Group.

  • Participate in a Live Virtual Clear Path To Cash Seminar:

There are some people who prefer to learn concepts through self-study through books or video series.  For others, such as myself, it is necessary to be in a classroom environment and to be guided through the concept.  We offer a Virtual Seminar each month.  It takes only three hours each day for two days, during which you will learn about The Clear Path to Cash Program’s eight steps. I am so passionate about this one that I teach it myself. — Virtual Seminar.

  • Work with me and my team privately:

If you’d like to go over something outside of a group setting, no problem.  All you have to do is click this link to schedule a 15-minute Triage Call. In 15 minutes, we see if my team can help you with your problem.  Sometimes we can give you some advice on the spot, other times we will invite you to a longer Burning Issues call, where we dig into the issue a little deeper and give you some great advice.  Even if we don’t believe our program is a good fit for you, we try to connect you with the right professional from our network of friends. —  Schedule Your Triage Call.