Customer satisfaction, employee satisfaction and cash flow the three most important
indicators for business.
The third component of financial statements is the cash-flow statement. There are two types of
cash-flow statements—one examines cash flows for a given period (historic), and the other is a
projection of future cash flows. Thehistoric cash-flow statement is similar to the income
statement in that it looks at cash inflows and cash outflows for a business during a specified
period of time. Like the income statement, these periods of time can be the fiscal year, the fiscal
quarter, or a month. The cash-flow projections statement attempts to identify cash flows into a
firm and cash flows from a firm for some future period. This projection is extremely important
because it may identify future subperiods in which a firm is producing a negative cash flow—
where cash outflows exceed cash inflows.
From the standpoint of a small business owner, cash-flow statements provide insight into where
cash flows are coming and going. The cash-flow projections statement may be the most
important component of all the financial statements. Its importance stems from the fact that the
flow of cash into a firm may not be synchronized with its cash outflows. Should there be a
significant mismatch with cash outflows being significantly higher than cash inflows, a business
may be in great difficulty with respect to meeting its current obligations, such as payroll, paying
suppliers, and meeting short-term creditors. As we will see, cash-flow projection statements
require several forecasts. These are discussed later in this section.
At some point, many businesses will experience negative cash flow. In fact, a negative cash flow
is quite common in start-up operations and high-growth businesses where there is a pressing
need for capital expenditures, research and development expenditures, and other significant
cash outflows. One can also see the recurring presence of negative cash flows in businesses with
seasonal sales. Negative cash flows can be covered by short-term borrowing. However, this type
of borrowing brings up two important issues. First, any type of borrowing raises the overall debt
level of a business, which might have an impact on the interest rate on the debt. Second, when a
negative cash flow exists either because of an unforeseen exigency or because a business owner
has failed to properly conduct a cash-flow projection analysis, a lender might look at a business
in a jaundiced manner, which could have long-term consequences for a business.
A careful examination of the cash-flow statement could illustrate a point that has been
mentioned several times in this book: there can be a significant difference between positive cash
flow and profit. In looking at the income statement, one could find a positive net income (profit)
and then examine the cash-flow statement and discover that a business has a significant
negative cash flow. The cash-flow statement specifically maps out where cash is flowing into a
firm and where it flows out. A properly developed cash-flow statement will show if a business
will be generating enough cash to continue operations, whether it has sufficient cash for new
investments, and whether it can pay its obligations.
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