| Cash is the lifeblood of business and understanding | | | | to turn this information into the required format |
| how the statement of cash flows works is | | | | to have an official looking statement. Well, if you |
| essential for every aspiring Richard Branson or | | | | take a look at my sample Cash Flows Statement |
| Mark Zuckerman. Putting together your cash flow | | | | you will see that the first line is net income, and |
| statement can be tricky for the newbie but is | | | | what is net income but part of the change in |
| actually very easily mastered with this simple | | | | retained earnings? If you read my earlier post on |
| hack. | | | | retained earnings you will remember that the |
| The Indirect Method | | | | change in retained earnings is comprised of net |
| The Philosophy of the indirect method is that cash | | | | income plus capital contributions less distributions. |
| flows should be in essence driven by profits so, | | | | So your net income, the first line on your |
| to calculate the indirect method of cash flows, | | | | statement, less your distributions or plus your |
| you start with your profits and then make | | | | contributions in the investing section will equal your |
| adjustments for everything that are not profits | | | | number for the change in retained earnings on the |
| until you get to your change in cash flows. When | | | | balance sheet you worked on in the paragraph |
| you think about it, this is very intellectually | | | | above. And so it is down the line, every line on |
| satisfying. After all, our main obsession is with | | | | your cash flow statement must either alone or in |
| profits, and rightly so. However, profits don't keep | | | | aggregate with another line equal a line in the |
| the employees coming back and the lights on, | | | | change column that you just calculated on your |
| cash does. So by closely examining all the uses of | | | | balance sheet. This is brilliant stuff kids and I wish |
| cash we can see where our cash is going and | | | | my accounting professor would have explained to |
| locate any potential problems; which makes the | | | | me this way. Actually, maybe he did but I sat |
| indirect method of calculating cash flows a fast, | | | | next to this really cute mamacita that day; I could |
| efficient, and very powerful weapon in your | | | | be a moron like that. |
| arsenal of business management for maximum | | | | The Challenges |
| profits! | | | | The next big challenge on your statement of cash |
| The Hack | | | | flows will be the change in fixed assets, which will |
| Debits equal Credits and the balance sheet must | | | | be a component of plus depreciation expense less |
| balance, or assets = liabilities plus equity, got that? | | | | any new assets purchased plus any assets sold |
| That's all the accounting you need to know for | | | | plus or minus the gain or plus the loss on that sale. |
| this exercise. Now take this a step further. | | | | The key is, when you add up those factors they |
| Download your comparative balance sheet into | | | | must equal that line for the change in fixed |
| Excel, you know, it's the assets = liabilities plus | | | | assets. If not you're forgetting one component so |
| equity page. Comparative means that we show | | | | review the equation in the first sentence of this |
| two periods, usually year ends, side by side. Now, | | | | paragraph and figure it out. |
| in the immediate column to the right make a total | | | | After fixed assets the next most complicated line |
| subtracting the current periods assets from the | | | | is the change in notes payable or debt. The |
| prior periods and copy it all the way down, except | | | | formula is that new monies borrowed minus debt |
| in the totals cells. Now move down to the liabilities | | | | payments plus interest expense will equal your |
| and equity section and do the opposite, | | | | change in debt. This is important because all three |
| subtracting the prior period from the current | | | | components will go on a different line on your |
| period. We do the opposite because credits | | | | statement of cash flows, but their sum must |
| (liabilities and equity) have the opposite value (-) | | | | equal the change that you calculated on your |
| from assets (+), but that's really not important at | | | | balance sheet or you're doing it wrong and you |
| the moment. Now sum the new column that | | | | need to review. |
| represents the change in the balance sheet. If you | | | | Other than that everything else pretty much |
| did the exercise right then the sum should be | | | | matches line for line between your balance sheet |
| zero. If you're not getting zero that means that | | | | calculation and the statement of cash flows. Just |
| you forgot to reverse the formula for the liabilities | | | | plug in the numbers and voila! your change in cash |
| and equity section or you included subtotal rows in | | | | flows will equal the amount that you calculated on |
| your new column. Pretty frickin' cool, huh? But | | | | line one of your balance sheet! If for some reason |
| that's not the coolest part. Now redo your sum to | | | | it doesn't just go back over and make sure that |
| exclude the difference in cash, usually the first line. | | | | you can reconcile each line for the changes that |
| The sum of all the other changes must be | | | | you calculated on your balance sheet to the cash |
| exactly opposite any single change, or in other | | | | flows statement. If you can't you must be |
| words the sum of every other change equals the | | | | missing a line. |
| change in cash flows times negative one!! Flippin' | | | | Finished, Miller Time! |
| mindblowin' stuff! And the basis of the Indirect | | | | When you're done patting yourself on the back |
| Statement of Cash Flows. | | | | for a job well done then it is time to get down to |
| Putting This Into the Statement of Cash Flows | | | | the really important business, what all this |
| You're 80% of the way there and, if you are | | | | madness means to you and your business and |
| only doing this to understand your business and | | | | how the statement of cash flows can help you |
| not to make a real, bona fide, according-to-GAAP | | | | run your business better. Alas, that is the source |
| cash flow statement then skip over the rest of | | | | of another article as I'm tired and turning in for |
| this post and head to the next. The next step is | | | | the night; so stay posted! |