What About the Cash?

The last item to compare on the balance sheet and the cash flow statement is the cash itself. On the balance sheet, cash on hand is usually listed as the first asset. On the cash flow statement, cash is the last line. It is calculated from what are called the sources and uses of cash. Sources of cash are incoming or positive numbers on the cash flow statement. Uses of cash are outgoing or negative numbers on the cash flow statement. Figure 6-8 demonstrates the connection between cash on the balance sheet and cash on the cash flow statement.

Figure 6-8: Comparing cash.

The final cash number on the cash flow statement should equal the amount of cash shown on the balance sheet.

Important ‚  

So, is what you see on the cash flow statement good or bad? The goal for an organization is to make sure that it always has enough cash to meet its obligations and to make necessary investments in the organization without having too much cash on hand. Too much cash is not good in that it invites managers to become lax in their controls and purchases as well as introducing the possibility of illegal activities such as embezzlement from the extra cash flow.

Figure 6-9 lays out ABC MediCompany ‚ s cash flow statement using the Senior management financial yardstick.

Figure 6-9: Cash flow statement graph.

As you can see from figure 6-9, ABC has a surplus of cash at this moment, about $700,000 worth. In this case, the surplus was planned in part due to a one-time increase in long- term debt. This increase was made to allow ABC to make some necessary improvements in PPE and adjustments to its marketing strategy. It is important to be cautious about one-time increases in cash from sources such as extraordinary income from the sale of assets, from new stock issues, or from long-term debt. Over the years an organization needs to be generating enough cash from continuing activities to remain healthy . Too many one-time instances of extraordinary measures without generating enough cash from continuing activities will sink the organization. For this reason, it is important to pay particular attention to the cash flow from operating activities. This section of the cash flow statement can be an indicator of trouble or success. Cash flow from operating activities can tell you if an organization is doing well or poorly in supporting itself from continuing activities. In ABC ‚ s case, cash flow from operating activities was $735,000. This is a positive indicator for ABC.

Could the cash flow statement for ABC MediCompany have looked quite different? Absolutely. As noted earlier, ABC ‚ s management is very pleased with the improvements in inventory management. These improvements were spurred in large part, however, because in prior years ‚ inventory, older equipment, and aggressive competitors had been threatening ABC ‚ s cash and profit margins. If ABC ‚ s management had not taken action, it could easily have had much less cash from net profits and inventory to add to the debt it will use to make necessary investments planned over the next three years.

Remember, Senior management ‚ s timeframe is often three to five years to carry out its vision for the organization. ABC is making its moves in alignment with its vision to be in the position to generate positive cash flow from its ongoing activities well into the future. Whether they are the right moves will only be known over time.

 

To communicate value based on the cash flow statement, you will use many of the same measures that you used to communicate value from the perspective of profit or position. This is because the figures on the cash flow statement are pulled from the income statement and the balance sheet. Therefore, the same WLP solutions that drove the changes in those statements will drive changes in cash flow. The difference in your value chains will be to substitute cash as the starting point for your Senior managers. A sample value chain for ABC is shown in figure 6-10.

Figure 6-10: Sample cash financial value chain.

Change management is hard to do well. If training or a performance improvement intervention was done well as part of ABC ‚ s successful JIT inventory improvement project, the case can be made that WLP has provided a portion of the value from the JIT project.