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Cashflow tip – What does the Cash Flow Statement Show us?

 

images/CashFlow.jpgThe Cashflow Statement is also called the Statement of Cashflows, and here we will begin to look at what the statement shows us. It is one of the 3 main financial statements that businesses report on – the other 2 are Profit & Loss, and the Balance Sheet.

The cash flow statement reports the actual cash generated and used during the time interval stated in its heading. The period of time that the statement covers is chosen by the company, for example, "For the Three Months Ended 31 December, 2015" or "The Fiscal Year Ended September 30, 2016". Most common is annual.

The cash flow statement actually uses data and the CHANGES between periods from the Profit & Loss and Balance Sheet, and organises and reports the cash generated and used in the following categories:

Operating, Investing and Financial activities

images/Business Cash Flow.JPG

 

What the Cashflow Statement shows

The profit & loss or Income Statement is prepared under the accrual basis of accounting, meaning the sales/revenues reported may not have been collected yet. Similarly, the expenses reported on the income statement might not have been paid. You could review the balance sheet changes to determine the facts, but the cash flow statement already has integrated all that information. As a result, savvy business people and investors utilize this important financial statement.

Here are a few ways the statement of cash flows is used.

1.     The cash from operating activities is compared to the company's net income (profit/loss). If the cash from operating activities is consistently greater than the net income, the company's net income or earnings are said to be of a "high quality". If the cash from operating activities is less than net income, a red flag is raised as to why the reported net income is not turning into cash.

2.     Some investors believe that "cash is king". The cash flow statement identifies the cash that is flowing in and out of the company. If a company is consistently generating more cash than it is using, the company will be able to increase its dividend, buy back some of its stock, reduce debt, or acquire another company. All of these are seen to be good for shareholder value.

3.     There are also some financial models that use the cash flow.

The statement of cash flows has four distinct sections:

1.     Cash generated from operating activities

2.     Cash generated from investing activities

3.     Cash generated from financing activities

4.     Supplemental information.

The differences in a company's balance sheet accounts from one period to the next, will provide much of the needed information. The changes - or differences - in the account balances will likely be entered in one of the sections of the statement of cash flows.

Of the four sections of the statement of cash flows, those balance sheet accounts which affect that section include -

1. Operating Activities

This section reports the net income and then converts it from the accrual basis to the cash basis by using the changes in the balances of current asset and current liability accounts, such as:

  • Accounts Receivable
  • Inventory
  • Prepaid Insurance
  • Other Current Assets
  • Notes Payable
  • Accounts Payable
  • Wages Payable
  • Payroll Liabilities
  • Interest Payable
  • Income Taxes Payable
  • Unearned Revenues
  • Other Current Liabilities

Note – As well as using the changes in current assets and current liabilities, the operating activities section may list adjustments for depreciation expense and for the gains and losses on the sale of long-term assets/investments.

2. Investing Activities

This section reports changes in the balances of long-term asset accounts, such as:

  • Long-term Investments
  • Land
  • Buildings
  • Equipment
  • Furniture & Fixtures
  • Vehicles

Investing activities involve the purchase and/or sale of long-term investments and property, plant, and equipment.

3. Financing Activities

This section reports changes in balances of the long-term liability and stockholders' equity accounts, such as:

  • Notes Payable (generally due after one year)
  • Bonds Payable
  • Deferred Income Taxes
  • Preferred Stock
  • Paid-in Capital in Excess of Par-Preferred Stock
  • Common Stock
  • Paid-in Capital in Excess of Par-Common Stock
  • Paid-in Capital from Treasury Stock
  • Retained Earnings
  • Treasury Stock

Financing activities involve the issuance and/or the repurchase of a company's own bonds or shares as well as short-term and long-term borrowings and repayments.

4. Supplemental Information

This section of the cash flow statement reports the amount of interest and income taxes paid as well as significant exchanges not involving cash. For example, the exchange of company shares for company bonds would be reported here.

Question? Email This email address is being protected from spambots. You need JavaScript enabled to view it. or call 0407 361 596 Australia


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Business Tips – What is the last Competitive Advantage for a business?

images/BusinessTips.JPG(This is a summary of key ideas by Paul Humphreys, of the book The Advantage, by Patrick Lencioni)

After watching his father come home frustrated  and complaining about how his company was managed, as well as working in management roles in large organisations himself , Patrick Lencioni found  that management decisions had a very real impact on workers and customers, and ultimately the business success.

He saw in his work that an organisation’s biggest opportunity was not only about strategy, finance, marketing – but the health of the organisation – and it filtered from the top leadership – that was the new competitive ADVANTAGE.

He also finds that it is ignored by most leaders even though it is simple, because it is seen as TOO easy, and requires some humility to face the truth, is not sophisticated, nor an adrenalin rush, nor easily quantifiable.

It requires being both HEALTHY & SMART (one is not enough) -

  1. Health - low politics and confusion, high morale, enthusiasm and productivity, and low employee turnover (and clients!).
  2. Smart – the usual aim to excel at strategy, marketing, technology and occupies the greatest focus.

Many admit that the characteristics of HEALTH above, would transform their company, but without having a method to foster and encourage it, gravitate back to focus on the more tangible SMART areas which are more measurable and visible. But the opportunities by being smart/innovative are more competitive and harder to achieve.

Patrick has found that health makes the difference in successful businesses, because most organisations already have the “smarts” within the team. Rallying around a solution works, when no politics and confusion occurs. Like healthy families can exist without great wealth.

But health is not easy to define, and is not celebrated in business reporting, although everyone one knows what it is like to be in an UNHEALTHY organisation and the misery of politics, dysfunction, bureaucracy and confusion. The toll of the anguish and frustration on staff and ultimately families is another result.

In the book Patrick explains -

All the competitive advantages we’ve been pursuing during our careers are gone. That’s right. Strategy. Technology. Finance. Marketing. Gone as the key to advantage.

No, those disciplines have not disappeared. They are all alive and well in most organizations. And that’s good, because they’re important. But as meaningful competitive advantages, as real differentiators that can set one company apart from another, they are no longer anything close to what they once were. 

That’s because virtually every organization, of any size, has access to the best thinking and practices around strategy, technology and those other topics. In this age of the internet, as information has become ubiquitous, it’s almost impossible to sustain a competitive advantage based on intellect and knowledge.

However, there is one remaining, untapped competitive advantage out there, and it’s more important than all the others ever were. It is simple, reliable and virtually free. What I’m talking about is organizational health.

The Healthy Organization

A healthy organization is one that has all but eliminated politics and confusion from its environment. As a result, productivity and morale soar, and good people almost never leave. For those leaders who are a bit skeptical, rest assured that none of this is touchy-feely or soft. It is as tangible and practical as anything else a business does, and even more important.

Why? 

  • Because even the smartest organization in the world, the one that has mastered strategy and finance and marketing and technology, will eventually fail if it is unhealthy. Trust me, I’ve seen it happen again and again. 
  • But a healthy organization will always find a way to succeed, because without politics and confusion, it will inevitably become smarter and tap into every bit of intelligence and talent that it has.

So if all this is true – and I am absolutely convinced that it is – then why haven’t more companies embraced and reaped the benefits of organizational health?  For one, it’s hard. It requires real work and discipline, over a period of time, and it must be maintained. On top of that, it’s not sophisticated or sexy. That means it doesn’t excite a group of executives who are looking for a quick fix or a silver bullet, something that they will be reading about in the Wall Street Journal or Bloomberg Business week.  Moreover, in spite of its power, organizational health is hard to measure in a precise, accurate way. It impacts so many disparate areas of an enterprise that it is virtually impossible to isolate it as a single variable and quantify its singular impact on the bottom line.

But the biggest reason that organizational health remains untapped is that it requires courageLeaders must be willing to confront themselves, their peers, and the dysfunction within their organization with an uncommon level of honesty and persistence. They must be prepared to walk straight into uncomfortable situations and address issues that prevent them from realizing the potential that eludes them.

Organizational health is about making a company function effectively by:

  1. Building a cohesive leadership team;
  2. Establishing real clarity among those leaders;
  3. Communicating that clarity to everyone within the organization; and
  4. Putting in place just enough structure to reinforce that clarity going forward.

The advantage of organizational health is undeniable and massive. Companies get more done in less time. They avoid losing their best people. They identify problems earlier and solve them faster. They beat rivals who waste time, money and energy fighting among themselves, which ultimately drives away good employees and customers.

Need Help? - Email info@accountkeepingplus.com.au or call 0407 361 596 Australia

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