Your balance sheet might look great—$10 million in assets and only $500,000 in liabilities. But if you don't have ready cash to pay your bills, you have a cash flow problem.
The concept of cash flow is easy to understand. In the words of every film-noir detective, follow the money. Cash flow is nothing more than the real money that flows in and out of your company—not the noncash transactions, such as depreciation, that you see on a profit and loss report.
Cash comes from three different sources, shown in Figure 14-6.
When you sell an asset, which is an investing activity, it shows up as a gain or loss on the profit and loss report, which temporarily increases or reduces net income. Beware: The effect of investing activities on the profit and loss report can hide problems brewing in your operations, which is why you should examine the Statement of Cash Flow report. If your income derives mainly from investing and financing activities, instead of operating activities, you have a problem.
To create a Statement of Cash Flow, QuickBooks deals the accounts that appear in your company's balance sheet into one of the three cash flow categories. And the program almost always gets those assignments right. Unless you're a financial expert or your accountant gives you explicit instructions about a change, you're better off leaving the QuickBooks account classifications alone.
Figure 14-6. ...