When you perform all the executive-level functions at your business, the important role of officer meetings, such as those at large enterprises, is overlooked. But a few intervals throughout the year are ideal for requiring your inner CFO to describe cash flow results to an empty room of imaginary executives. You’ll force yourself to articulate key money matters. This prevents them from remaining mere abstract concepts in the dark recesses of your mind.
Cash flow is different than profit. Cash flow from operations ignores uncollected revenue and unpaid expenses. These elements are identified on a cash flow statement as the changes in accounts receivable and accounts payable. You then add or subtract other factors from operating cash flow. Interest expenses and depreciation are added. Costs for depreciable assets are subtracted. Loan payments are also subtracted. Any money that’s borrowed or that you put into the enterprise as an owner adds to cash flow.
A cash flow statement is a key report, but some smaller operations already maintain cash basis bookkeeping. In those cases, cash flow from operations can be identified from the cash basis income statement, which already excludes uncollected income that’s still in accounts receivable and unpaid expenses that are still in accounts payable.
Comparing cash flow from one period to another delivers insight into the overall financial health of the business. Although rising cash flow is generally good, building too much cash may indicate excessive borrowing, not paying bills on time, or ignoring replacement of old equipment. Short-term cash flow dips are not so bad if they result from increasing revenue that’s not yet collected.