Chapter 6: Cash

In this Chapter:

• The cash component of step 3 of the financial value process: identify financial imperatives

• Why cash is not the same as profit

• Why executives must manage cash in addition to profit and position

• How to read a cash flow statement

• How changes in net profit (or loss) and changes in the balance sheet increase or decrease cash flow

• Examples of financial value chains connected directly to cash flow.

In this chapter, you ‚ ll finish making connections to financial statements and work on step 3 of the financial value process by examining cash flow statements. Cash flow statements go by various names such as statement of utilization of funds, source and application of funds, or some equivalent title.

Cash flow statements track the sources and uses of an organization ‚ s cash to ensure that the organization is maintaining enough actual cash to pay the organization ‚ s expenses on time. As you examined the balance sheet in chapter 5, you saw that profit from the income statement did not equal cash on hand. Much of the organization ‚ s profit can be tied up in non-cash assets such as accounts receivable or inventory. If too much cash is tied up in these types of assets, the organization cannot pay its employees or its suppliers. Not being able to pay your employees or creditors is a very unpleasant situation to be in.

Because shortages of actual cash can stop the organization from running, Senior managers must ensure that sufficient supplies of cash are available at all times.

Important ‚  

As a WLP professional, if you know what is causing cash flow problems, when having enough cash on hand is likely to be an issue for your organization, and how your solutions help Senior executives manage cash, then you have a valuable story to tell.

Figure 6-1 depicts the cash flow for ABC MediCompany. Numbers from the income statement and the balance sheet are used to reflect the changes in cash that our fictitious company, ABC MediCompany, has experienced .

 

Figure 6-1: ABC MediCompany ‚ s cash flow statement.

As you can see, the cash flow statement is split into three parts :

1. cash flows from operating activities

2. cash flows from investing activities

3. cash flows from financing activities.