Page 104 - Finance for Non-Financial Managers

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The Cash Flow Statement: Tracking the King
Ladies and gentlemen, allow me to introduce to you the
statement of cash flow.
OK, maybe that’s a bit dramatic. But the reality isn’t that far 85
afield from my playful musings. Most small businesses, for exam-
ple, don’t prepare a statement of cash flow as a routine part of
their monthly financial reporting, even though almost all account-
ing software systems produce one. In larger companies with well-
staffed accounting departments, the report is often produced, but
infrequently read, except by the accountants and the CFO, whose
job it is to act on it (and perhaps tell others what it says).

Beginning Where the Income Statement Ends
There are two or three formats for presenting the cash flow
statement; in this book we’ll use the indirect method of presen-
tation. It’s the same format as appears in all published financial
reports of public companies and the same format as the report
that’s readily produced by most accounting software. It’s also
the format that produces the most useful information with the
least paper. And the really good news is that it begins where the
income statement ends, literally, because its intent is to answer
that important question raised earlier, “What is the difference
between net profit and net cash flow?”
Answering that question gets us into defining the differences
and then presenting them in a way that non-financial readers
can understand. A few words about format will be helpful here,
before we actually look at a report.
Accountants have presented cash flow in two ways tradition-
ally, the direct method and the indirect method.
The direct method is likely what you might prepare if you
were analyzing your checking account to see where the money
came from and where it went. It would look something like
Figure 6-1.
As you can see, the report shows cash coming in and cash
going out. Well, isn’t that what it’s supposed to show? Yes. But it
can and should show much more. You’ll notice there’s no men-