Cash Flow What?

Your CPA will always include a statement of cash flows when issuing reports on your financial condition—it’s a requirement under GAAP, those generally-accepted accounting principles that for many years have brought standardization and uniformity across industries. A statement of cash flows basically adds balance sheet changes to net income to illustrate how the organization has provided or used its cash and cash equivalents over the period (usually a year).

CPA’s will argue that the statement of cash flows holds real value for business managers, and you can even find a course or two that teaches how to understand and utilize them. Recognize however that a statement of cash flows, like your income statement, acts as a journal to tell you where you’ve traveled.

When times are tough, cash is king. You want to be pointed forward, scanning the horizon for opportunities and challenges, not backing out of the driveway by means of your rearview mirror. That’s where a cash flow or financial forecast comes in.

The cash flow forecast evaluates your expected receipts and disbursements based on assumptions about customers, sales, inventory movements, asset purchases, operating expenses and taxes, to name the most common financial activities. A good financial forecast gets to the heart of your organization’s business model by asking such questions as:

• Do we have sufficient inventory to carry us through the next period without substantial investment?


• Will our major supplier keep the pipeline full?


• Can we expect our customers to pay within terms?

A statement of cash flows typically fails to generate this level of discussion, much less inform the reader concerning future cash position, so most organizations will find the need to produce financial forecasts too.

You’ll want a financial manager who understands how your business works when it’s time to prepare financial forecasts. A skilled professional will not only ask the right questions to capture the essence of your business model and incorporate it into the forecast, but will also make recommendations for change—provided the right atmosphere. A back-of-the-envelope request will engage a very limited discussion of assumptions and expectations, while a detailed financial forecast will examine all the “rocks”.

Expect your chief financial officer to take an active interest in your operations. If he’s locked in his office away from marketing, engineering and operations, his scope will be as narrow as his four walls and he’ll miss key assumptions when called upon to produce financial forecasts. This same deficiency will afflict your budgets and business plans too. You need an accountant who will prepare financial forecasts that convey the way your business really works.