Introduction to Financial Statements (part three)

The Cash Flow Statement

Now we come on to the most interesting part; liquidity and cash. Now the most profitable businesses in the world can bankrupt themselves if they take their eye off the most essential lesson of all in running a business:  Cash is King. You can have a billion pounds in sales but if your invoices are unpaid, or not paid in time for you to meet your own liabilities, then you are in trouble. This is why it is so important to chase your receivables and why one of the first responsibilities of a new finance hire in a growing business will be debtor management.

Firstly, cash and cash reporting is very simple. Its quite black and white: cash is in the account or it isn't. This becomes more of a grey area when businesses start to forecast their cash so that they can plan funding for when cash is tight or possibly investment for times when they are cash rich. When forecasting cash it is important you are dealing with the latest intelligence, closest to source if possible and this will inform meaningful forecasts.


A cash flow statement looks like this:

Cash flow from Operations                      £X/(X)

Cash flow from Investments                    £X/(X)

Cash flow from Financing                         £X/(X)

Opening bank balance                             £X/(X)

Net change in cash                                   £X/(X)

Closing bank balance                               £X/(X)


Cash flow from operations is the money you get from your trading activities. You start off with your profit before tax, strip outany non-cash charges such as depreciation, and any changes in the balances of inventory/receivables/payables and focus on what has actually changed hands in cold hard cash in terms of the sales and purchases you have made.

Cash flow from investments is not simply any stocks and shares you have bought but also the capital investments or receipts you have made in your own firm, buying and selling land, buildings and plant & machinery.

Cash flow from financing relates to the issue of loans and shares and also any dividends you have paid to shareholders.

If you add together CFO + CFI + CFF you arrive at the net change in cash in the period to which you are reporting. Add/subtract that from the opening bank balance you had at the beginning of the period and you must arrive at the closing bank balance as per your bank statement. Hey Presto!

This brings us to the end of our series introducing the reader to the financial statements. If you are an avid reader of financial statements there are other things to be aware of, such as the Statement of Changes to Equity which does just that and details changes in ownership, retained earning etc. Also sets of accounts will have notes added by the financial accountant/auditor to further explain the statements for ease of understanding and to eradicate ambiguity so that statements are reliable and relevant and can be easily compared.

As we have touched on cash forecasting here, next week we will look more closely at forecasting techniques and how to make them meaningful so that they add value to your business and allow you to plan wisely for the future.