How to Read a Statement of Cash Flows (SCF)
by Clayton Tomasino, CEO of Scorpion Protective Coatings, Inc.
Our company has grown by leaps and bounds over the last several years. We have gone through very high growth times, where we had a surplus of “Net Income,” but no money! Later I found out that this happens to most high growth companies, but no one ever talks about the why or how. This article is hear so that you can be in the know.
1) The Statement of Cash Flows is “the man behind the curtain.”
Everyone looks at the balance sheet and the P&L, but the SCF gets no love. Why is this not being taught? It is great to have a positive net income and a bunch of assets, but ultimately “Cash is King.” Who has the keys to your kingdom?
2) It takes three.
A statement of is split into three categories. Operating Activities, Investing Activities & Financing Activities. Add these up and then add in what you started with and there you go!
+ Investing Activities
+ Financing Activities
Cash from the period
+ Starting Cash
3) Operations are where it’s at!
When looking at your SCF, you want to see the money coming from the first category – this one shows you how your daily activities are generating a return. If they are not – you need to evaluate your activities!
Net Income (from P&L)
– Accounts Receivable (Potential Cash You Have Not Received)
+ Accounts Payables (Stuff You Have Not Paid for Yet)
– Inventory Assets (Not Cash Yet!)
+ Credit Card, Credit Line: Statements (Cash in Pocket)
– Credit Card, Credit Line: Payments (Cash to Bank)
Net Cash from Operating Activities
4) Investments come and go.
You do not want to spend too much on you facility without getting a return from operations. In addition, you can only sell so much or so many of your hard assets until your operations can be “no more.” This is an area to try to keep in lockstep with the others, and not to get into a “build it and they will come” scenario unless someone else is paying for it (i.e. the bank).
– Buy/Improve Building or Equipment
+ Sell Building or Equipment
Net from Investing Activities
5) Don’t Depend on Financing!
Once again, I reiterate that Operational Cash is the key. If you find that your cash is coming from financing year after year – please know that your luck will run out eventually. There are a finite amount of shares you can sell or loans you can take!
+ Money from Loans
– Pay Off Loans
+ Sell Equity/Shares
– Buy Equity Shares
Net from Financing
The Statement of Cash Flows is the most overlooked report that there is in business. It is an ironic thing because to most small businesses – it is probably the most important! If you just examine your Operational Cash Flows on a periodic basis, you will be ahead of 99.9% of the other business owners out there. For more information on how to build your business, check out www.ScorpionCoatings.com. Until next time!