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Part 4

Managing Cash and Receivables

27. Cash Flow Statement

Introduction

Current profitability is only one important factor in success. Also essential is cash flow. In fact, a business can be profitable and still have a cash crisis. An example is a small business with a high level of credit sales but with a very long collection period. The business shows a profit but does not have the cash from those sales.

It is essential to know your cash flow in order to plan adequately. Should you cut back on cash payments? Where are you obtaining cash flow? Where are you spending your money? What products are cash drains or cash surpluses? Is there adequate money to pay bills and purchase required equipment? Are you liquid?

A statement of cash flows is useful because it provides valuable data that are not available in the balance sheet and income statement. The statement presents the sources and uses of cash and is a basis for cash flow analysis.

How is it Computed?

The statement of cash flows classifies cash receipts and cash payments from (1) operating, (2) investing, and (3) financing activities. Let’s look at each of these major sections.

1.Operating activities relate to the manufacturing and selling of or the rendering of services. Cash inflows that come from operating activities include (a) cash sales or collections on receivables and (b) cash receipts from interest income and dividend income. Cash outflows include (a) cash paid for merchandise and (b) cash paid for expenses.

2.Investing activities relate to the purchase and sale of fixed assets (such as equipment and machinery) and the purchase of stocks and bonds of other businesses. Cash inflows comprise (a) amounts received from selling fixed assets and (b) receipts from sales of stocks and bonds of other companies. Cash outflows include (a) payments to purchase fixed assets and (b) disbursements to buy stocks and bonds of other entities.

3.Financing activities relate to borrowing and repayment and to issuing stock and reacquiring previously issued shares. Cash inflows comprise (a) funds obtained from loans and (b) funds received from the sale of stock. Cash outflows include (a) paying off debt, and (b) repurchase of stock.

Example

Consider Mr. Paul, who owns a business that sells appliances. The statement of cash flows for this small business follows: