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

CHAPTER 17

CASH FLOW FROM OPERATING (PROFIT-MAKING) ACTIVITIES

A Different Type of Connection

Personal Note from Tage

In my travels over the past 20 years, without question the most difficult financial statement for businesses to prepare (let alone understand) is the statement of cash flows. While most businesses tend to focus on and have a good handle on the income statement as well as the balance sheet (although more challenging to understand), the statement of cash flows might as well be prepared in a foreign language. Small businesses particularly struggle with the cash flow statement as they generally lack the internal accounting sophistication and resources to understand how important this financial statement is. I must admit that my experience has been skewed toward small businesses (i.e., companies with annual revenues less than $100 million) but without fail and with more than 80 percent of the companies I provided professional counsel to, the cash statement was almost always missing or, when presented, nobody could explain it.

The reason the cash flow statement has taken on a new level of importance can be traced back to the Great Recession, which started in 2008. On top of the severity of this economic downturn (which numerous experts noted as being the second worst economic downturn over the past 100 years only trailing the Great Depression), one of the critical events and outcomes of the Great Recession was that available sources of capital (including access to equity ...