Cash Flow Management

Cash is to a business what blood is to a human, no matter how much you have, it won’t do you any good pooled in one place. That may sound rather strange coming from a Chief Financial Officer, but in order to grow and sustain itself, every organization must have cash flow. Simply sitting on a pile of cash will not allow for long term growth.

There are three sources of cash flow that we monitor, Cash from Operations, Cash from Investing and Cash from Financing. Combined these three sources tell the story of the organization for the most recently completed period. When we look at these sources over time, we can tell the completed story.

Cash from Operations begins with the Net Income for the period and then adds or subtracts the Balance Sheet changes for the same period that consumed or produced cash. This translation of the Income Statement proves out the old accounting saying ‘Profit is an opinion, Cash is Fact’. A set of financial statements that show Net Income but cannot show positive Cash from Operations should cause some alarms to be ringing in the mind of the reader.

Cash from Investing takes into account the use of cash to purchase assets or invest in other organizations. Any organization that is not regularly spending on replacement of its assets may be hurting the organizations chances in sustaining itself over the long haul. Periodic drops in investing in assets as a result of economic conditions are not as harmful as not doing any investing over time. One of the keys is to have a plan, you may have to modify the plan to match circumstances, but reviewing Cash from Investing over time will demonstrate what the plan has provided over time.

Cash from Financing demonstrates how much the organization either borrowed or paid back to its lenders or investors over the period. It is not unusual for an organization to consume all of its Cash from Operations on its Cash from Investing section and therefore have to borrow additional funds from its bank. In today’s environment, most banks are asking their clients to lower their borrowing, which can be done either by reducing its Investing activities or increasing the Cash from Operations.

As a child, I remember a television station would say, its 11 PM, do you know where your child is? I would like to paraphrase that, we are knee deep in a recession; does your organization know where its Cash Flow is?

©Strategic Financial Leadership, Inc.