Where Did the Cash Go? Look at the Cash Flow Statement

Do these questions sound familiar: Where did our organization’s cash go? Why does our income statement say we made money, but our bank account does not? Why does it feel like cash is always tight, but we keep having to pay taxes for business profits? Why can’t we take more money out of the business? What is profit if I can’t see it, feel it, and know where it went? If you are asking these questions, you are not alone. Just Google the phrase “cartoon cash flows” and you’ll get a better (albeit comical) sense of how it challenges many organizations. If you want to discover the secret of “where the cash goes,” look at the Cash Flow Statement. That is exactly what I would do if you asked me.

Understanding Cash Flow
Let’s start with the definitions of key financial statements:

• The Cash Flow Statement summarizes the amount of cash coming in and going out of your organization during any given period. The Statement combines two core financial reporting statements – the Income Statement and the Balance Sheet.
• The Income Statement shows your organization’s income and expenditures.
• The Balance Sheet reports your organization’s assets, liabilities and equity.

To determine your organization’s cash flow, combine the net income or loss from the Income Statement with changes in the balance sheet accounts for the same period. If you look at the Income Statement or Balance Sheet individually, you only get part of your organization’s cash flow picture, creating a number of questions. Looking at the Income Statement in concert with the Balance Sheet AND Cash Flow Statement gives you get a better picture of your organization’s performance. It can help you to identify that inventory sucking the cash out of a business, that vendor terms have shortened while customer payment habits have lengthened, that your collection team is hitting a home run and receivables are coming down, or that all your cash went to debt service. Fill in the blank for your particular business.

In accounting, a standard part of Generally Accepted Accounting Principles (GAAP) financial statements is the presentation of Cash Flow Statements. And for good reason. External users of financial statements, such as lenders, find this statement to be valuable because it articulates what areas of the business are having a positive or negative impact on the cash position of the operation. There are also formatting parameters that rule over how the Cash Flow Statement should be presented in GAAP financial statements. Those rules are made to ensure consistency and transparency to users of the financial statements, but it does create a level of rigidity.

Whereas GAAP financials are typically prepared once per year and are generally for users outside the organization, financial statements that companies use internally are a vital tool for ongoing decision-making and analysis. As a financial professional, I personally think the Cash Flow Statement is one of the most valuable tools for internal accounting. The amount of flexibility a business has on how they want this statement to be formatted is endless. You can group activities in a way that make the most sense to company management – by the month, by the quarter, year-to-date, rolling 12 – the analysis possibilities are endless. Your business software may not be able to do exactly what you want, so there may need to be some excel work done to build the model. Even if it takes some time, I think you will find the time worth investing.

So, ask no more: Where did the cash go? Look at a Cash Flow Statement, it will tell you.
If you have any questions about how to create or use a Cash Flow Statement – Please let us know. Walz Group welcomes the opportunity.

This installment is brought to you by Ben Ritenour, CPA, CGMA. Ben is a Director in the Walz Group’s Assurance Division. His broad range of expertise supplements the firm’s traditional offerings. Not only does he oversee compilation and review engagements, but his hands-on experience in private industry allows him to perform a variety of consultative services for clients, including outsourced CFO services and bank examination procedures.

Ben is a member of the American Institute of Certified Public Accountants (AICPA).

Connect with Ben on LinkedIn or contact our office to get in touch.