The Comprehensive Guide on How to Read a Financial Report: Wringing Vital Signs Out of the Numbers, + Website

CHAPTER 2

STARTING WITH CASH FLOWS

Cash Flows—Just How Important Is It for a Business?

Not so long ago, back before central bankers and governments both near and far had to bail out the world’s economies, the concept of understanding cash flow was basically a foreign language, best left to the bean counters and Wall Street financial types to deal with. This was before the worst financial crisis to hit the United States (and for that matter, the world) since the Great Depression was experienced, starting in 2008 with the collapse of Bear Stearns and Lehman Brothers, which laid the foundation for the start of the Great Recession (that many still argue the world has not fully emerged from).

You may be asking why this reference is being provided, which is simple. Unlike central banks, businesses cannot magically create cash when needed and out of thin air but rather must understand what sources of cash are available and how cash is used or consumed.

Now let’s go back in time to pre-2008, when life for businesses, governments, and even the individual consumer was different. Capital or access to cash was readily available, credit underwriting standards were limited to poor (think residential real estate mortgage lending), financial markets appeared healthy, and economic growth was solid if not strong across most industries. The focus in the mid-2000s time period was not on understanding or even caring about cash flow but rather, most parties were concentrated on a financial report perceived ...