How to Read The Statement of Cash Flow
Why the Statement of Cash Flow?
To monitor the health of the business, CEOs often reference the balance sheet (BS) and the profit and loss (P&L) statements. The balance sheet is great for assessing the business' credit risk and for calculating book value, which is a measure of worth. The profit and loss statement shows trends and how much your company spends as a percentage of revenue (margins). These are all important numbers to know, and it is incumbent upon CEOs to study them and improve them, but margins and book value are not the best indicators of a business's health. What matters most is the business' sources and uses of cash.
Businesses Die When They Run Out of Money.
Cash is like oxygen for a business. Without cash a business will not be able to make payroll or meet its other short-term obligations like rent or interest payments on the credit line etc. In fact, a business could conceivable have a great P&L statement that reflects healthy margins and strong net profits, and STILL GO OUT OF BUSINESS. How is that possible? It's possible because the P&L doesn't tell you if you've collected the funds. It only tells you what you've accrued or earned. Just because you sent an invoice for $10,000 doesn't mean that your client is going to pay it in a timely fashion. The statement of cash helps you understand three things:
The sources and uses of cash (operations, investing, financing)
How much (net) cash did you add or spend this period
How much cash do we have to meet our obligations (runway)
Your bookkeeping system should allow for you to monitor cash flow in real time. QuickBooks online allows CEOs to access their important financials statements, like the Statement of Cash Flows, on demand and from a mobile device.
In this segment of the Accounting For CEOs series, Liz breaks down how to read the Cash Flow Statement, and how to access it in QuickBooks Online. Please consider our QuickBooks Online Training course if you need help configuring an accounting system for your business.