The Hidden Hero Of Your Company

When I was pursuing my undergraduate degree in accounting, my courses glorified the income statement as the “all-knowing” document. The balance sheet too, though slightly less emphasized, was considered an integral piece of evidence to indicate company health. After graduating and initiating my career at Ernst and Young, as auditors, we relied almost solely on balance sheet information. The balance sheet proved an easy indicator to ensure that our respective accounts would tie. As I have progressed in my career as a multi-industry consultant, I have found that these two financial statements, though important, pale in comparison to the transparent statement of cash flows.

Cash is king.

No one can deny this. Nothing feels better than having enough cash to cover operations. For some reason, however, the statement of cash flows is treated like the “red-headed stepchild” of the financial world. The statement requires a higher level of financial acumen and a little more time to decipher, causing people to dismiss it.

In my experience, businesses seeking to advance to the next level must have a solid understanding of the statement of cash flows in order to gain a clear view on their company’s well-being. A previous article that I wrote entitled “What EBIDTA Conceals and Cash Flow Reveals” specifies the shortcomings of EBITDA. The article emphasizes EBIDTA as an incomplete financial measure because of the easy manipulation that can occur to misrepresent a company’s financial story.

Operating cash flow is the true metric of a company’s financial condition.

There is no way to manipulate the numbers. Operating cash flow starts with net income and is calibrated based on adjustments to net-income from non-cash items such as depreciation, amortization, and other gains and losses on assets. Changes in working capital such as fluctuations in accounts receivable, accounts payable, or other asset or liability accounts reflect the true economic increases and decreases in cash flow.

Cash flow, not profits, are the lifeblood of any business. Seventy percent of businesses are profitable when they close their doors. A company can be highly profitable, but if their money is tied up in accounts receivable, the business quickly becomes insolvent. My mission is to educate business leaders to realize the true impact that cash flows can have on their businesses from an operating and financing perspective.

If your company is only focused on the income statement, you must shift perspectives to see the different, more lucid story that your numbers are telling you. Why does a company’s income statement reflect profitability when their bank accounts have run dry?

Evaluating cash flow is crucial because the implications are serious. A company that fails to understand this can run out of cash or invest itself out of cash. Without a solid cash flow strategy, a business simply cannot survive. Perhaps the statement of cash flows is less the “red-headed stepchild” and more the company hero.

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