Six Essential Cash Flow Statement Uses

Posted by Rock LaManna on Mon, Sep 17, 2012 @ 09:09 AM

Six Essential Cash Flow Statement Uses resized 600
“If I had to run a company on three measures, those measures would be customer satisfaction, employee satisfaction and cash flow.”

Jack Welch, Former CEO of GE


Are you looking for a way to take more control over your company’s performance?  Here are six cash flow statement uses that can put you in the driver’s seat.

Understanding your cash flow is a critical but somewhat lost art.  Most business owners treat their own financial reports like Wall Street treats economic indicators.  They get nervous, cross their fingers, and pray they’ve guessed right.  

You can’t afford to do the same.  By using your financials correctly, you can manage the process instead of having it manage you.  A cash flow statement is a perfect example.  Here are six ways it can help save your business.

1. Know where you’re at, instead of where the bank says you’re at.  A well-planned cash flow statement will provide you with an accurate picture of your actual cash position, and not just what the bank balance sheet shows.   That allows for more accurate forecasting, and less dice rolling.  You’re in control of your cash flow!

2. Live within your means (and your month).  Instead of spending willy-nilly, or worse, living in constant fear of over-spending when you know your monthly expenses, you get a good feel for what types of investments you can make.  This helps you prioritize what you need, and when you can afford to make a purchase.

3. Brace for any icebergs on the horizon.  Integrating cash flow into long-term strategic plans allows you to avoid any impending financial icebergs that may sit just below the water.  You can adjust cash flow if you’ve got a big expense coming up, either accelerating collections or slowing down expenses.

4. Reassure the folks holding the purse-strings.  An accurate cash-flow analysis can reassure lenders and investors, assuring them that you’re on top of your current situation.  They may be more likely to work with you if you demonstrate awareness of your situation.

5. Accurately track (and invest in) the next big thing.  With an accurate cash flow analysis, you’ve got great insight into a new product or service that you’ve rolled out.  You can determine how long you’ll stick with it if it begins to falter, or what kind of resources you can dedicate to it to really make it go.

6. Make sure history doesn’t repeat itself.  Not using previous financial history as you build new budgets is ridiculous.  You can use prior cash flow statements to track seasonality and adjust to ebbs and flows in your business.

The level of reporting you choose in the end is based on your current resources and your ability to tap into relevant data.  Financial guru Lee Rust recommends a report that combines balance sheets and performance criteria, so you can eyeball significant trends or quick changes.

That report should be combined with the cash flow analysis, which provides analysis of the previous six weeks, and a projection of six weeks in the future.  You’ll also want to extend your cash flow statement for 3 to 5 years, every month.  

While these types of long-term forecasts aren’t entirely accurate, you should keep them and adjust them to short-term results.  It will help indicate whether your goals are within striking distance, or if you’re heading in the wrong direction.

Can a cash flow analysis save your business?  Like Smokey Bear sagely commented, “Only you can prevent forest fires.”  A cash flow analysis alone may not save the day, but it will surely help you spot the smoke.

Photo by: 05com


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