In many businesses, we see
monthly reports consisting of a profit and loss statement and a balance sheet. But the cashflow report is often MIA.
The importance of a cashflow report can vary, and many clients ask if they truly need one. The short answer is,
yes. If you’re a growing company with increasing demands on working capital, or you have a heavy capital investment program,
definitely.
In both these cases, a cash flow report is critical. But, in my experience, cash flow reports are useful to businesses at any size and stage.
Many business owners continue to monitor their bank account as an indicator of their business’s health, but there are so many factors that can affect cash balances that this analysis is inadequate.
Why Are Cashflow Reports Important?
Here’s the uncomfortable truth: profitable businesses can fail. Not because they can’t make money, or don’t have a good product or service, but because they ran out of money. You can have a healthy-looking P&L that shows strong growth and margins yet still struggle to pay people when they (or the ATO) come knocking.
This can happen for several reasons, but two of the most common that I see are either because a business is flying blind by not producing regular cashflow reports, or they don’t understand the fundamental difference between cash and profit. (Cash being the reality of what lands in your bank every month, profit being your
income when it’s earned and
expenses when they’re incurred, regardless of when payment is received.
For more information, I recommend you jump back a step and read this post: Working Capital and Its Impact on Cashflow.The Trouble With Existing Reports
Accounting systems effortlessly spit out Profit and Loss and Balance Sheet reports, and this is very convenient for busy owners. (Whether they are well designed is a separate question. But yes, the ability to produce reports in a single click is alluring!)
However, producing a cashflow report inevitably requires real effort that involves cross-checking logic and pulling information from different areas. Often, this is a barrier to the willingness of an accountant to do the work. Which, in the case of most tax accountants, makes sense. They produce P&L and Balance Sheets to comply with tax return lodgments and rarely need to produce a cashflow report that isn’t required for tax.
Beyond this, the standard accounting cash flow presentation, which doesn’t explicitly show working capital impacts or the link to profit, is largely nonsense and is effectively useless as a management information outcome. This format was designed with the investment community in mind, not people running a business.
The Match Point Cashflow Report – Grab Your Copy
Over the past thirty-odd years, I have developed a robust format, which I’m happy to share with you.
Is it rocket science or particularly revolutionary? No. However, it is
clear that several focuses make it useful for its primary purpose:
to help business owners and executives understand how cash is flowing through their business. Here’s why it works:
- The link with profit is explicit
- Working capital movements are clear and detailed
- The impact of potentially ‘big ticket’ items like capital expenditure, debt repayments and income tax are shown separately.
And it’s all yours – a concise, no-nonsense, one-page cashflow report which clearly explains why your bank balance may not be as big as you thought!
To access, simply drop me a quick email and I will send it straight to you, obligation-free. Read more on our other blogs:
