Now You See Cash, Now You Don’t

By Allan Tepper, Co-founder and Senior Managing Partner, CFO Consulting Partners LLC

A dilemma takes place within a company; the CEO notices that the company’s cash supply has run dry. “How is this possible?”, the CEO wonders. “My company remains profitable, but according to our bank statement, much of our cash has disappeared,” he mused.

There are a variety of reasons why a firm’s cash supply will run dry. Some would be lower profitability, capital improvements, pay down of debt and/or accounts payable, and slow cash receipts. It’s possible the CEO may have failed to receive a missing key component of the company’s accounting records, the cash flow statement.

The cash flow statement holds an extremely important role in the financial management of any company. This statement incorporates elements of the income and balance sheet statements to create a “map” that shows the changes in cash flow. In effect, companies can make more informed decisions regarding investments and spending. With the cash flow statement, companies gain a more accurate and detailed perspective of their finances. Without it, companies are operating more or less in the blind.

In order to maximize and retain financial transparency, companies should have a constantly updated cash flow statement. However, an accurate cash flow statement begins with careful preparation of a company’s income statement and balance sheets. By directing more attention to these three financial statements, especially the cash flow statement, companies will have a fuller understanding of their business.