5 Reasons Cash Flow Statements Are Important - KPI
I’m always amazed when I run across Chief Financial Officers who don’t believe a cash flow statement is the most important part of the financial package when it comes to small business management. Small businesses run on cash and knowing where cash is and where it’s gone is among the most important things a small business owner can know.
For those of you who either don’t know what a cash flow statement is or don’t think it’s very important here are some reasons you might want to reconsider your position on this topic:
A cash flow statement can tell you if you’re running out of money while you’re profitable.
Yes, profits are incredibly important if you’re a small business, but cash is even more important. It’s possible that fast growing businesses can be profitable, and at the same time run out of cash. A cash flow statement can tell you if this is happening.
A cash flow statement can tell you if the owner is taking too much money out of the business.
Many small businesses are pass through organizations and are taxed as Subchapter S Corporations. Owners of these companies will often take money out in the form of distributions. Distributions don’t show up on a profit and loss statement but do show up on a cash flow statement.
You will see the results of building inventory, letting receivables grow or paying suppliers more quickly.
Changes in any of the three areas above won’t show up in your profit and loss statement. They will appear in your balance sheet, but you have to understand how to interpret the changes. In a cash flow statement they are easy to spot and that helps you understand what’s happening to your cash.
Capital purchases show up as an expense.
Your profit and loss statement won’t show you if you’re buying too much equipment. Your cash flow statement will. If you need equipment, you can see how that equipment should be financed.
You’ll see what your bank loan payments are doing to your cash.
As with equipment purchases, payments to your bank for principal don’t show up on your profit and loss statement.
These changes in your cash position often mean your business will run out of money if not managed properly. They have nothing to do with your profit and loss statement but they have a huge effect on the cash in your business. And, there is a major rule of business; if you run out of money you don’t get to play the game anymore.
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