Reading A Cash Flow Statement

          Ah, the Statement of Cash Flows.  Most out-of-the-box accounting software has one available in the report section.  You may also receive one from your bookkeeper, or your accountant.  It can seem a little cryptic (and maybe even pointless).  In fact, the Statement of Cash Flows is one of the most useful reports a small business owner can have.  While the actual statement may not have answers, it can be used to ask some telling questions.
          There are three sections of the Cash Flows:  operations, investing, and financing.  As the names suggest, each one relates to the business activities.  The SEC has a great document outlining the accounting behind all three of these, so I am not going to go into that.  The general rule is positive numbers mean cash increased in that account, and negative numbers indicate cash decreased (or was used).
          In the Operating section of the cash flows, the main points are:  operating income, or your profitability for the period; changes in receivables; changes in inventory; and changes in payables.  An increase in receivables and inventory will be a use of cash (negative number).  An increase in payables will be a source of cash (effectively, you are borrowing from your suppliers).  While reviewing the accounts, ask yourself the following questions:  

• If the operating income is a negative number, is it attributable to an event, or a trend?
• Are receivables increasing  or decreasing as a result of sales activity, or collection activity?
• Are payables increasing as a result of more purchases, increased costs, or slower payment?
• How does the activity in payables relate to receivables?  Here, you may see an increase in receivables and an increase in payables.  Effectively, your customers are borrowing from you, and you are borrowing from your vendors.
• Is the change in inventory due to quantity or price changes?  Is the change related to the change in sales?  Is the change reflected in the change in payables?

The Investing section of the cash flows primarily relates to assets you've purchased.  The main question to ask here is:  

• Are the asset purchases contributing to profitability (operating income)?

The Financing section of the cash flows relates to money borrowed to run the business.  This money can be in the form of loans, credit cards, or even your own cash (equity).  

• Are the funds used for operations or for investing?  

If the funds are being used for operations, you may want to look further into the company's profitability.  The use of cash in this section (a negative number) should be intentional, such as a loan to purchase machinery.  Unintentional financing, such as a creeping credit card balance, are signs of larger issues.

          Reviewing your Statement of Cash Flows and asking the above questions will help you get a handle on trends in your business, and how your cash is working (or not) for you.  After a few times, you will find that this report is just a meaningful as your income statement.

Mastering Your Cash Cycle - the Next Step

Okay, you have mastered the basics of the cash cycle.  You are collecting like a bunny, paying like a turtle, and sticking to your plan.  You are ready to push the envelope and actually make your money work for you.  By following the steps below, you can actually make $1 in revenue equal to more than one dollar.  This works for your business, and your personal finances.

1.)  Deposit your money as you receive it directly into an interest-bearing account.  To start with, keep it simple and use a savings account.  The interest on those isn't the greatest, but the cash is available to use as you need it.  

2.)  Pay your bills with a credit card or line-of-credit.  A line-of-credit is preferred, but a credit card with a limit equal to one month's budget is okay.  In calculating your monthly budget, subtract the bills that you have to pay for by check.  The credit card or line-of-credit provides a limit on monthly spending, and you can easily check your progress by checking your balance.


3.)  Pay off the balance on your credit card or line-of-credit monthly, before interest accrues.  This piece is key, so I will repeat:  do not allow the lending account to carry a balance.  If you spend more than you make you are starting on a downward spiral that can be very hard to overcome.

Voila, your cash earned interest in your savings account during the 30-day cycle that you borrowed from your credit card or loan.  

www.mint.com/how-it-works

A very good tool to use is the free online finance software, Mint by Intuit.  With a few easy steps, you can enter all of your accounts, which Mint will update with transactions for you.  There's a budget that's very easy to use, and there's also an overview screen that shows your cash balance and budget activity at a glance.  They even have an app so you can update and check any time, anywhere.


The cash cyle is a business process that most of us don't consciously think about.  By making a plan for the flow of cash, we can take our company's cash position from a passive result of business to an active participant in profits.

Mastering Your Cash Cycle, the Basics

          Cash is an elusive small business tool.  One minute it's there, the next it's gone.  First you have none, then you have some, then someone else has yours.  The trick to keeping cash around is not what you think.  Okay, yes, putting it in savings and never, ever taking it out is a great idea, but not very practical.  Below are three (more practical) ways to keep cash working for you.

1.)  Collect like a bunny.  Collect your sales receivables at or before terms.  To do this, implement a collection process (habit) to train your customers to pay on time.  One or two months of reminders and your customers will pay on time.  A good collection process is to send a reminder (by email preferably) when the bill is 1 to 5 days past due.  A phone call at 10 to 15 days past due will motivate your customers to pay on time in the future.

Courtesy of flickr.com via Creative Commons

2.)  Pay like a turtle.  Pay your suppliers and vendors as far after terms as possible.  Unless you receive a discount for paying early or there's a penalty for paying late, never pay early or on time.  If possible, negotiate with your vendors to provide an early payment discount and terms that are longer than the ones you extend your customers.

3.)  Plan your spending, then stick to it.  Sit down and review your budget and plan your bill payments for a minimum of three months at a time.  Do this only once a month, if possible.   By looking at your cash position once a month, you are able to see the big picture, which helps you to make smart spending decisions.  Having a plan also reduces your stress, and limits the stressful process to monthly, rather than daily.

If you follow these three steps, your cash can work for you.  You can extend your cash cycle, giving your business the opportunity to invest the money.