The Statement of Cash Flow is the evolution of the Statement of Changes in Financial Position. It is a highly useful tool within the guidelines of Generally Accepted Accounting Principles (GAAP) to effectively analyze the operations of an organization from a financial perspective.

It is a common, and true, statement that “Cash is King”. This is why the Statement of Cash Flows is so important. When you understand what it’s telling you it becomes an enlightening view of the company. It is as if you have been going through a room in the dark for years and then you see it with the light on.

One of the companies where I have been Controller had a division that was privately held prior to it’s acquisition as a division of our company. The company ran about 40+% gross margins with 20+% net margins and wound up being acquired by our company for the amount of its’ debt to us. How could this highly profitable company come to such a demise? The company was excellent in sales, marketing, pricing, and product quality but what they didn’t do was effectively manage the inflow of cash into the business and it cost them the business.

By understanding the Statement of Cash Flow and looking at the information as it applies to your organization you can greatly increase value and longevity for your company.

The objective of the Statement of Cash Flow is to show you both where your cash is coming from and what you are spending it on. That is it plain and simple. By seeing the numbers quantified it will, to a large degree, confirm what you already know – it may be that all of the cash is coming from the bank or investors and the money going for capital investment or customer financing.

The Balance Sheet is a point-in-time report providing a birds-eye view of the financial health of the company while the Income Statement is an operational report telling how well the company did over a period of time. The Statement of Cash Flow is the bridge between the Balance Sheet and Income Statement and, like the Income Statement, is an operational statement and completes the picture of what happened in the business from one Balance Sheet to the other. Knowledge is power and cash is king.

Treatment of Revenue & Expenses

Components of Net Income

Usually a Source of Cash

Treatment of Assets

Types of Assets

Usually a Use of Cash

Treatment of Liabilities

Types of Liabilities

Usually a Source of Cash

Treatment of Equity

Types of Equity Accounts

Can be a Source or Use of Cash

Operational Impact

Effects of extended terms to your customers (A/R)

Effects of extended terms from your suppliers (A/P)

Effects of high Accounts Receivable and/or Inventory

Effects of lowering Working Capital

Digging out of a cash hole

For further explanation and illustrations, check out Understanding Cash Flow