Page 117 - Finance for Non-Financial Managers

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Finance for Non-Financial Managers
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report will indicate that still more detailed analysis is needed to
answer questions that it raises, but it’s better to raise those
questions than to be unaware of them. In Chapter 7 we’ll look at
additional ways this information can be presented to give us an
even better understanding of cash flow without the hard work.
Manager’s Checklist for Chapter 6
❏ The statement of cash flow fills a critical information need:
it analyzes all the reasons that net income didn’t produce
an equal increase in cash in the bank. It’s by far the easi-
est way to get that information.
❏ Cash is needed to finance customer purchases on credit. If
accounts receivable is growing faster than sales, it’s a cash
drain for the company. This is often the largest cash
requirement a growing company will have, and it cannot
be ignored without risking impairment of essential working
capital.
❏ Inventory is the second largest consumer of cash, and
cash invested in inventory takes the longest time to be
converted back into cash again. If inventory is growing
faster than sales and expected future sales are not increas-
ing correspondingly, the company may be wasting its cash
and risking future losses on liquidation of old inventories.
❏ Investments in the company, purchases of assets, borrow-
ing, and other activities to finance company operations
and growth are activities that usually involve significant
amounts of cash. They are most easily seen and tracked in
the statement of cash flow.