I had an exciting experience this week! The founder/CEO of a company that we are helping to return to profitability after a COVID collapse asked me to help him learn how to read the Statement of Cash Flow, so he could better manage the relationship between net profit and net cash flow. Am I easily excited? Nope. But this was unique because, in my 30+ years of working with CEOs of private companies, of requiring that report to be produced every month, and of using it to help clients’ businesses get healthier, that question has never been raised first from the client’s side of the table.

Why? Well, it’s easy to see why CEOs like the income statement. It purports to tell them how much money they made. It doesn’t address the question of why that profit didn’t get into their bank account yet – or ever, in some cases – but they are usually comforted by looking next at their balance sheet, which purports to show the value of their company, at least on a cost basis. The net worth that it shows grows with every dollar at the bottom line of their income statement. That’s true, arithmetically, even though many of those dollars will never make their way into the bank account. Along the way inventories will shrink, receivables will get written off or discounted, liabilities will pop up unexpectedly, all in the normal course of business.

There’s a good reason that the Statement of Cash Flow begins with reported net profit and ends with the cash balance that appears on the balance sheet. It’s the translator between those two reports. It explains why all those profit dollars didn’t get into the bank account AND it gives clues as to why that will continue unless management does something different. It’s akin to a ready-made analysis of cash generating trends, or cash draining ones, especially when presented in the monthly trend format that we always recommend.

  • If you can see that your inventory is absorbing more cash each month but it’s not feeding growing sales, that should point you to some action around inventory control.
  • If you can see that your accounts receivable balance is shrinking while your sales are flat, that tells you something – you’re liquidating your balance sheet and may soon have liquidity issues.
  • If you can see your accounts payable growing each month, enabling a growing cash balance (or more likely preventing a shrinking one) that should tell you it’s only a matter of time before vendors start downgrading the value of doing business with you.

These things literally jump off the page of the Statement of Cash Flow, whereas it might take some studying to get the same information without that key report in front of you. If you’re one of your company’s leaders, you need information like that without having to dig for it. Well, there it is, right in front of you – if you ask for it.

We are Your CFO for Rent.

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