To clearly understand your company’s ability to cover expenses and liabilities, as a business owner you must regularly assess the cash flow statement. So what exactly is a cash flow statement. A cash flow statement records a company’s cash inflows and outflows. Stated differently, this statement presents the amount of cash and cash equivalents entering and leaving your company during a specified time frame. The cash flow statement enables you as the owner, your managers, bankers and suppliers to view your company’s operations from a cash perspective. Thus, all better understand how smoothly (or not) the company runs its operations, where growth funding is or will come from, and how wisely your firm spends its money. The cash flow statement breaks down the cash inflows and outflows into three sources of cash – operations, financing and investing.

Operational (or Operating) Cash Flow.

Operational cash flow measures cash inflows and outflows from your company’s core business activities. This section of the statement shows clearly whether your company’s revenue structure can cover all of its day-to-day operational expenses. If the revenues cannot, the net operating cash flow appears as a negative. If your company has a problem collecting on its receivables or is amassing unsold inventory, that issue will appear here. Late or missing payments by customers greatly restrict incoming cash. If your company has seasonal trends, cash flow may also vary by the accounting period. Monitoring the cash and projecting out operating cash flow can help you identify potential shortfalls in advance.

Investing Cash Flow.

Investing cash flow measures cash generated from or used in investing activities. This includes purchases or sales of equipment, property, a subsidiary or business unit. This section reflects changes in items in the asset section of the balance sheet. If your company is growing rapidly, due to all the capital expenditures made, your firm will typically show a negative investment cash flow. Struggling, asset-rich companies often show continual asset sales that offset negative or low operational cash flow. A perfect example was Kodak in 2010 through 2012, when it finally filed for bankruptcy. Kodak sold off many assets during this time period to generate enough cash to cover the huge negative cash flow its operations generated.

Financing Cash Flow.

When your company produces insufficient operating cash and/or experiences negative cash flow from investing, it must generate cash through financing  activities.  Financing  cash flow measures cash generated by financing activities including the acquisition of new debt, issuance of equity, repayment of principal and issuance of dividends. This section reflects changes in the liabilities and shareholder’s equity section of the balance sheet. For example, a tech company that received a venture capital investment infusion will show the proceeds here.

Periodic Review of the Cash Flow Statement .

In general, all other things being equal, the higher the operational cash flow, the stronger your company. By periodically reviewing the cash flow statement, rapidly growing companies can identify the need for cash in advance and utilize financing to cover the shortfalls or fund growth. A troubled company could head off financial distress by noticing negative operating cash, minimal investing cash, and significant financing cash flow. Seeing various negative cash flows on the cash flow statement could lead you to re-structure operations and revamp the financing structure before it becomes too late to do so.

An example: You examine the cash flow statement and it appears that the sole purpose of new financing your company entered into is to replace old financing. You need to dig deeper as this could be a warning sign. Your company may have brought in equity investors to pay off debt in preparation for a massive expansion. Paying off debt would reduce or eliminate cash outflows for principal and interest payments. Or your company may now have a better credit rating and have taken on new, lower cost debt to replace old debt. However, the new financing could also mean that your company is treading water and does not have the operational cash flow to pay down the debt. In this case, the new debt is simply delaying a business failure, meaning you will need to dig deep into your operational practices to determine the cause of the issues and avert business failure.

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Copyright © 2014  by Tiffany C. Wright. The above is an excerpt from the book, The Funding Is Out There! Access the Cash You Need to Impact Your Business,  published by Morgan James Publishing and currently available on Amazon for pre-purchase in ebook format (release date: August 2014) and in bookstores and libraries in October 2014. All information is copyrighted. No part of this publication may be used without prior authorization from the author. To join the VIP Club and receive EXCLUSIVE freebies, event notices, and special offers, or for an advance copy in eBook or softcover format, please visit www.thefundingisouthere.com.