Page 116 - Finance for Non-Financial Managers

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The Cash Flow Statement: Tracking the King
Dividends Come from Profits, Not Losses!
You’d have to ask yourself why a new company without
strong cash flow would pay a dividend—and that would be 97
a good question to ask Wonder Widget’s board of directors, in view of
its cash position. Since the directors are probably also the owners, this
could have been a self-serving act that was not in the best interests of
the company but in the interests of the owners personally. Such errors
in judgment are sometimes made in privately owned companies run by
their owners, for whom personal cash flow problems often impact
their companies.As we’ve seen in the past couple years, even the
largest companies can fall victim to the bad judgment of their top
executives/stockholders.While this decision was not necessarily bad,
you should ask yourself the question whenever dividends are not
clearly coming from profits that have been earned.

ance of cash—which should have appeared on the prior
month’s balance sheet—and arrive at a grand total that’s the
new ending balance of cash—which should appear on the bal-
ance sheet of the month being reported on. In this fashion the
statement of cash flow is tied into the balance sheet just as it
was tied into the income statement from the first line. This little
step helps to ensure that every transaction has been accounted
for on one or the other of these reports.

Using This Report Effectively

You’ve seen how each of the major activities of a company can
affect cash flow in a significant way. The statement of cash flow
is intended to make those effects easily visible, so that readers
of a company’s financial reports can identify and address nega-
tive impacts and preserve positive impacts on cash. This report
can be longer or shorter than the example used here, but it
should include an adjustment line for every item on the balance
sheet that has changed, except for cash itself.
You really cannot understand the cash flow activities of a
company without this report or, as an alternative, without sub-
stantial detailed analysis of its cash records. Sometimes this