For any business cash is important, many people even say that “cash is king.” So when a business owner is looking at their cash position are they referring to their bank balance or are they looking at their statement of cash flows? Many small business owners do not use the statement of cash flows and, instead rely on the balance in their checking account. I recently asked my students this question: “What information are you missing by not reviewing the statement of cash flows. How could the use of the Statement of Cash Flows help a business owner run their business more effectively and efficiently?”
One of my students, Mark, stated that, “relying on a checking account balance is very dangerous.” He mentioned that by looking only at the bank account a business owner isn’t preparing himself for liabilities that may come due, such as sales taxes. In many states the business is a collection agent for sales taxes on behalf of the state. The business will collect sales taxes upon recording a sale. The cash will sit in their bank account for about 30 days (give or take depending on their submission due dates). This is false cash in the bank. Even if you know a portion of the cash in the bank it isn’t yours, you might not be considering all of your debt and accounts payable items along with account receivables to determine your true cash position.
Another students, Craig, summarized that the statement of cash flows allows you to view the cash on hand in tandem with the items due to you and payable by you. This is because the statement of cash flows presents the flow of cash in three different categories: operating, investing and financing. In the operating section you can see how much cash is being generated from the daily sale of products and services as well as the payment for operational items.
Most accounting software providers offer the option to generate a statement of cash flows at a point in time. If you are currently reviewing your income statement and balance sheet each month or each quarter consider adding the statement of cash flows to analyze. Knowing how much cash you have in the bank is important, but planning for both the receipt and use of cash can be accomplished easier with the statement of cash flows at your fingertips.