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Finally, A Cash-Flow Report That You Can Understand

Most business owners never look at their cash-flow statement. Even for me, as a professional accountant, they can be rather cumbersome to create and boring to look at.

Finally, we have a cash-flow report format that you can really see.

A cash-flow report that puts the color back in and takes the word flow placing it in the context of something like water flowing down a waterfall.

The reporting system we use, created by Fathom (Australian software company) really makes cash-flow statements look beautiful and easy to follow.

Profit Statement versus Cash-Flow Statement

You see, most business owners are really, really focused on the Profit and Loss Statement. And, that’s a good thing, except the Profit and Loss Statement does not equal cash-flow.

You can make money and actually go broke, so keeping an eye on your cash-flow is critical.

What are the elements of a cash-flow statement?

It starts with – your sales – how much revenue did you bring in. And it shows it at the top of the “waterfall”, in a band of green color, like water starting at the top of a cliff, flowing downwards.

Next – in a band of red color are your direct expenses, or cost of goods sold. This is your first main outflow of money, so it is in red.

After that is your general operating expenses, or overhead. It, too, is in a band of “red”.

This equals your net profit, and, of course, as you know this is not really your cash-flow. We have to adjust it.

(Side note – Can cash-flow ever be equal to net profit? Yes, it can, in rare cases. When all your sales are cash, and all your expenses are paid in full, out the bank, that month, or period. But that is rare).

Now, we have to adjust the net profit to get to cash-flow from operations.

Getting to Operating Cash Flow from Net Profit

We get to that number – imagining the cash now flowing in as a green color and out as a red color as the funds flow down the waterfall from top-to-bottom.

We first add back the positive or negative change in accounts payable. In other words, if our accounts payable increased, that is a source of cash, and will show up as a green band, flowing in.

On the other hand, if we paid off a lot of accounts payable and it went down, then we would have the red band showing a negative effect on cash-flow.

The exact same holds true for accounts receivable and inventory. If our receivables went down, we have a nice green band showing money coming in, if they went up, it will be red.

If you are good at “turning” your inventory and it went down, it, too will be a green flow of cash coming in.

We do this for all changes in the business’ working capital (it’s current assets and current liabilities).

At this point in the downward flow of cash, we have a number called Cash-Flow from Operations, and the next element in our statement is…

Free Cash-Flow

The items that you invested in to grow your business – things like capital assets, or intangible assets. These are usually red items as you invest in capital assets.

It could, however, be green, if you have sold capital assets.

We have now arrived at Free Cash-Flow. This term is used because it is the cash that is available to pay to the suppliers of capital – the lenders and owners.

Net Cash-Flow

From there, we deduct any long-term loan interest, dividends, and these would show up in red. The green cash inflows would be new financing or owner injections.

Finally, we arrive at Net Cash-Flow. When you add this dynamic number to your opening cash bank balance then you arrive at your closing bank balance for the period.

To Recap

The main components of cash-flow are:

  1. Sales flowing in (green)
  2. Expenses flowing out (red)
  3. Increase in accounts payable (green) (Why green? Because you haven’t paid these payables yet, so they are a source of money, hence, green)
  4. Decrease in accounts payable (red) (You paid off your vendors and used up cash)
  5. Increase in accounts receivable (red) (Your customers haven’t paid you yet)
  6. Decrease in accounts receivable (green) (Your customers have paid you)
  7. Same for other current assets and current liabilities
  8. Equals – Net Operating Cash-Flow
  9. Less – All of your investments in long-term assets (red)
  10. Plus – sales of long-term assets (green)
  11. Equals Net Free Cash-Flow
  12. Plus- owner injections/ long-term loans from lenders (green)
  13. Less – owner withdrawals/debt repayment (red)
  14. Equals Net Cash Flow

I know this looks rather dreary and complicated when written out. So, now take a look at how that looks in color, in the waterfall effect:

 

Thanks for reading…