Understanding Cash Flow for a Better Business Value

If you want a better business value as a business owner, then understanding finance basics is essential. Here’s how to read a cash flow statement effectively.

“Many small businesses would rather face an angry barbarian horde than tackle their cash flow statement.” Nicole Fende

The Balance Sheet and the Profit and Loss Statement work in relation to each other to show the cash flow statement. The cash flow statement is the movement of cash in your business.

A Cash Flow Statement is NOT always included when the Accountant prepares at the end of the financial year.  It is an essential part of any management accounts reports you should ask your accountant for.

Business Mentor helping you get a better business value

As your business grows, getting clarity on your numbers on a regular basis becomes critical to your decision making.  Getting a bettre business value is about having your finger on the pulse of your business numbers.

But remember the Cash Flow Statement, like all the other Financial Statements, is backward looking.  Putting together a Cash Flow Statement is an essential part of managing your business.

The cash flow statement is:

• Net Profit, 

• Adding back any non-cash items that were in the profit and loss such as depreciation;

• Taking off any capital expenses that have been incurred such as any purchase of fixed assets and;

• Recognising the change in working capital.

Are You ‘Banking” Your Customers?

Recognising how many debtors have paid us is important for managing amounts owed. Understanding how many suppliers we have paid means you don’t pay twice. Recording any tax payments that have been made means to don’t get nasty surprises from HMRC. Your closing cash figure which will be shown on the balance sheet as the balance of cash. It is an asset if it is cash reserves. Or it’s a liability if there is an overdraft. 

The cash statement shows you what you’ve spent your cash on and where you’ve generated your cash from in the past. It can be broken down into a more detailed analysis so that you can clearly identify, for example, profitable parts of the business especially if your business has a diverse offering. 

Where working capital has increased, there is MORE cash tied up in stock, debtor and creditors – the cash flow statement reflects this by reducing the cash balance by the net effect of the movement.  

If the working capital decreases, there is LESS cash tied up in the running of the business.  This is a trend worth following as it allows you to spot when the business is increasing its working capital, which can quickly reduce your ability to pay your liabilities on time. 

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