How to Read a Financial Report: Wringing Vital Signs Out of the Numbers

Chapter 1. STARTING WITH CASH FLOWS

Importance of Cash Flows: Cash Flows Summary for a Business

Business managers, lenders, and investors, quite rightly, focus on cash flows. Cash inflows and outflows are the heartbeat of every business. Without a steady heartbeat of cash flows, a business would soon die.

So, we'll start with cash flows. For our example I use a business that has been operating many years. This established business makes profit regularly and, equally important, it keeps in good financial condition. It has a good credit history, and banks lend money to the business on competitive terms. Its present share-owners would be willing to invest additional capital in the business, if needed. None of this comes easy. It takes good management to make profit consistently, to secure capital, and to stay out of financial trouble. Many businesses fail these imperatives.

Exhibit 1.1 summarizes the company's cash inflows and outflows for the year just ended, and shows two separate groups of cash flows. First are the cash flows of its profit-making activities—cash inflows from sales and cash outflows for expenses. Second are the other cash inflows and outflows of the business—raising capital, investing capital in assets, and distributing some of its profit to shareowners.

I assume you're fairly familiar with the cash inflows and outflows listed in Exhibit 1.1. Therefore, I'll be brief in describing the cash flows at this early point in the book:

• The business received $51,680,000 during ...