The Statement of Cash Flow is the most important of the three Financial Statements, because it deciphers the cash flow for you. It’s the translator, the one that bridges your Income Statement and the Balance Sheet. And, it’s probably the one you’ll have the most trouble learning to read.
The Statement of Cash Flow begins with the net income of your business and deducts items that impact cash but don’t impact net income. Examples of that are increases or decreases in inventory or accounts receivable. An increase in inventory will not change your net income, but it certainly will impact your cash – you’ll be spending cash to buy inventory, but the inventory may or may not be sold.
The Statement of Cash Flow also adds back items that impact your net income but don’t cost you any cash. The best example of that is depreciation. We call depreciation the phantom expense, because while it hits the books as an expense, it doesn’t impact your cash.
The Statement of Cash Flow also breaks down other types of income, such as income from investments your business has made and income it receives from financing, and it deducts the direct costs from those other income sources as well. If you had a line of credit, for example, the Statement of Cash Flow would show all deductions you made for repayments, interest, insurance, and any other costs to service that debt.
Accurate financial statements provide the information you need to identify your organization’s strengths and weaknesses. Interpreting the information in financial statements plays a major role in executive decisions.
Although the people who prepare financial statements may differ from company to company, this task is usually the responsibility of an accountant. It is critical that business owners understand that this is a task they should not undertake. As a business owner, your time should be spent evaluating your organization’s performance and making it more profitable.
If you need to find ways to reduce costs and focus on your core business, contact us. At Cash Flow Accounting, we guarantee we will prepare timely and accurate financial statements designed using the information you provide. We will also teach you to interpret the data using our “Stats at a Glance” on line program. Find out how we can improve your business, contact us at Info@CashFlowAccounting.com.