By: Allan Tepper
Ever ask yourself, “Where did my cash go? I am profitable and yet my bank account is scraping bottom.
The answer may be because non-income items are draining your cash. These can come from capital improvements, sluggish cash receipts from sales, too quickly paying accounts payable, and many other reasons.
On the other hand, perhaps you are unprofitable and cash has not declined or even increased. Could get confusing and even lead an executive to make bad decisions. This phenomenon could happen should a line of credit offset declining cash from profits, a large receivable was just settled, a building was sold, a government grant was received, and many other types of situations.
So the question is, how would you find out what is happening? The answer is the cash flow statement. This statement brings together the income and balance sheet statements to show you what happened to your cash.
Of course, a given is that the busines generates a balance sheet. Too often, our firm sees small businesses that do not produce balance sheets, which makes preparing the cash flow statement exceedingly difficult.
Knowing what happened to your cash is critical in order to make proper decisions. I had a nonprofit client awhile back that received grant money that masked sustained losses. The organization did not use the cash flow statement, and hence blindly acted as if everything was in good shape. This eventually lead to a significant financial crisis and an erosion of trust in several senior executives by the board.
In summary, carefully prepare all three main financial (income, balance sheet and cash flow) statements. And spend the time to understand where the cash is coming from and going. I believe you will make more informed decisions and have a more profitable company as a result.
