What Is the Cash Flow Statement Tell You?

Why is it important to look at the changes in cash for the year?

If you are an outside investor, you have an interest in knowing where all the money went because you want to make sure that some of it will come back to you in the form of interest or dividends. If you are the manager of the business, you also need a recap of where all the money went. For example, if the cash balance went down by $14,000 and most of it was due to an increase in accounts receivable, you need to know why your accounts receivable increased. Did your business grow by leaps and bounds over the year, causing you to finance the increase in the accounts receivable base with internal cash flow? Or did your accounts receivable clerk quit part way through the year, and your new one isn't nearly as good at getting money in the door? Once again, it's not numbers for numbers' sake; it's the story the numbers are telling you.

Putting It All Together

In theory, once you've accounted for all other balance sheet changes, the change in cash should plop out the bottom. In reality, it can sometimes be a little tricky getting your cash flow statement to work.

It's important to talk it through if it's not working. "There is an increase in capital assets; therefore, that's a use of cash," and similar explanations will help keep you focused.

Notice that you calculate the change in the cash (i.e., the total increase or decrease) for the year and then add it to the opening cash to get the closing cash. This works by calculation, but remember to actually compare the closing cash to your cash (bank) balance on your balance sheet!