This is the third installment in a brief discussion about the Statement of Cash Flows. In the first I spoke about how QuickBooks easily allows users to see the difference between two sets of accounting methods with the difference being that one method is dependent on the timing of cash flow through the business. In the second I discussed the three sections of the Statement of Cash Flows and how these sections make the report such a valuable tool for managing the business’s cash position. In this final of three posts, I am going to talk more about the Operating Activities section and how it will help to identify where your opportunities are and help you determine what you can do to exploit them.
In the Operating Activities section, the first item on your Statement of Cash Flows is your Net Income. This is straight from your Income Statement. The following items are often referred to as “adjustments to reconcile Net Income to Net Cash Provided by operations” and they include:
Depreciation expense – the expense associated with reducing the value of assets that you bought such as vehicles and equipment as the value declines over time. Since the assets were already paid for or financed through debt. This expense has no impact on your cash balance so it is added back to the Net Income.
Changes to working capital – working capital is another term for all the items on your balance sheet that aren’t there for long. It includes Accounts Receivable and Payable, Inventory, Payroll Liabilities, Prepaid Expenses and Customer Deposits to name a few. While some items like Payroll Liabilities are very straightforward about how and when they will be paid, most other working capital accounts can be worked to help you improve your cash flow.
To get you thinking, here are some opportunities to influence your cash flow. To work Accounts Receivable you can shorten your billing cycle and bill immediately, have customers with different payment terms, use E-billing, credit cards or bank draft services to collect quicker. For accounts payable you obviously have quite a big influence over the timing, but you can also negotiate terms and use E-payment services to perfectly time your payments. We offer Bill.com to our clients to facilitate super efficient cash processing. Inventory can be a big use of cash and planning how to balance the need to have adequate stock without carrying surplus is a delicate task but one well worth the effort as it will free up valuable cash. A good place to start is to compare how much inventory you have on hand by item and divide the total by your average daily unit sales for the item. If this number is significantly greater than the amount of time that it takes to receive an order of the item you probably have an opportunity to bring some cash back to the business.
These are just a few of many ideas but I hope that they gets you started thinking about how you can make a statement with your cash flow. Please feel free to share any of your approaches in the comments section.
The Shared Finance Center provides outsourced accounting, bookkeeping and CFO support to small business owners and in doing so we heavily focus on maximizing cash flow. If you think that this post would be helpful to anyone you know, please pass it along.