This is the fourth of four articles on Making Money. Making Money Part One: Don’t Let Work Get in the Way argued that ‘Cost of Goods Sold’ activities should come first. Making Money Part Two: Net Profit described ways use income statements to make more money. Making Money Part Three: Balance Sheets described ways to use balance statements to make more money. This article will explore how you can use your cash flow statement to make more money.

Israeli physicist and business guru Eliyahu M. Goldratt is our guiding author for this series. He defined the goal of making money as follows: “This is the goal: To make money by increasing net profit, while simultaneously increasing return on investment, and simultaneously increasing cash flow.”

Cash Flow

The purpose of the cash flow statement is to calculate the net change of cash and identify why it changed. Sometimes operations, assets, and margins can distract us from the reality that cash is the only thing we can turn around and spend to feed our families. The cash flow statement helps keep us focused on producing cash income. The cash flow statement also tracks from where cash is coming and to where cash is going.

Basics

The cash flow statement is not generated independently. It is generated from the balance sheet and the income statement, modifying them so that all noncash transactions are excluded, and combining them into 3 categories. Because the Cash Flow Statement excludes all transactions that have yet to be converted to cash, it is the clearest measurement of a business’s finish-line success.

The cash flow statement is a report of only 4 numbers. The first three numbers measure three distinct sources of cash flow. The final number totals them. The four numbers are the following.

• Cash Flow from Operations
• Cash Flow from Investing
• Cash Flow from Financing
• Change in Cash

Deception

Because there are fewer arbitrary, subjective, or qualitative decisions to make in calculating objective cash totals, the Cash Flow Statement is the most straightforward of the statements. In fact, being straightforward is its only purpose. Where the other statements generate and present data on several dimensions of the business, the Cash Flow Statement looks at only the most objective and finalized quality: cash.

The Change in Cash is important for paying bills, but the real power of the Cash Flow Statement is in the three cash flow categories. The rest of this article examines where each of them comes from and what they mean.

Cash Flow from Operations

Cash Flow from Operations is a form of Net Income, modified enough to exclude unpaid receivables, exclude asset sales, and exclude depreciation. While these are important to track when projecting net income over several time periods, they mean nothing in terms of cash achieved from operations this time period.

Use Cash Flow from Operations to measure the total current completed income of current operations. It may not tell you what kind of income and assets you’ll need next period, but it tells you exactly what you made this period.

Cash Flow from Investing

Cash Flow from Investing is where we measure money out and money in as a result of capital expenditures and asset sales. Like the operations cash flow, we still are not interested in capital expenses that happened before or after the current time period, so we ignore depreciation and other amortized accounting expenses.

 

Use Cash Flow from Investing to measure changes in capital expenses during the current time period. It may not tell you what kind of capital you bought before this period or what kind of capital you will need after this period, but it will tell you exactly what capital you bought and sold during this period.

Cash Flow from Financing

Cash Flow from Financing is where we measure money out and money in as a result of loans, equity, and dividends. It is calculated using the balance sheet. Like the other cash flows, we are not interested in financing made before or after this period. We are only interested in the financing change during this period.

Use Cash Flow from Financing to measure how much you distributed from your company, how much you invested in your company, and how much you borrowed to your company. It may not tell you how of your company’s financing changed before or after this period, but it will tell you exactly what financing changed during this period.

Conclusion

The Balance Sheet shows a snapshot in time of the subjective value of assets, liabilities, debt, and equity of a company. The Cash Flow Statement shows the change in objective cash during a period. The Income Statement shows the subjective changes during a time period that can be used to project changes in objective cash outside the time period.

The time period of each statement is a strong indicator of how each statement should be used. As the only statement that focuses exclusively on cash, the Cash Flow Statement is your best way to measure where your money went during a period. In many ways, that makes the Cash Flow Statement the most important. “Because,” in the words of Eliyahu M. Goldratt, that’s important “there isn’t one item…that’s worth a damn if the company isn’t making money.”

Next Steps

Financial analysis is the science and art of using data to maximizing earnings, especially accounting data. Assisting you in making more money by helping you avoid lying to yourself is what we do best. You don’t need a full time CFO. You just need us. We are your part-time, outsourced CFO.

Ask us how you can make more money.