Cash Flow Statements are the missing link for many companies. Especially those under 10,000,000 in annual revenues.
The lack of cash flow reporting raises two negative concepts.
The overall financial reporting process is deficient and challenges whether the remaining financial statements should be relied upon or not?
Why are the words “relied upon” used in this context? The cash flow statement is the ultimate proof of the entire financial reporting process. It encompasses all of the transactional conduct of the balance sheet and the P&L. It captures everything and defines the cash impact of every transaction within the reporting period. It walks forward the cash balance in great detail to isolate and identify all of the sources and uses of cash.
It also provides illumination regarding managements financing strategies as well as provides trend lines for changes in cash.
What is ownership using to manage and operate the company if they are not evaluating their cash activity on a monthly basis.
Many times, that answer is literally frightful such as:
Accounting brings me a bank balance report every Tuesday or Accounting brings me a detailed AR report every Tuesday.
I cannot tell you how many companies I have seen that have 3,000,000 in AR and then cannot make payroll. Poorly run companies get unpleasant surprises all the time. Good and bad surprises
A good surprise could be a new 2,000,000 contract but it requires an immediate purchase of 500,000 of raw materials.
A bad surprise is the tax return is complete and the company owes 1,600,000 in taxes.
It is critical to be forward looking and to project your future cash needs and then manage the company accordingly.
All buyers highly value free cash flow generating companies. Financial buyers won’t even proceed past stage one if they do not see the level of cash generation they require.
I highly recommend that you complete cash flow statements for the last three years if you do not already have them and then become astute about what they are communicating!