This information is derived from Rehmann’s Private Client Advisory (PCA) experience, a uniquely tax-aware approach to growing and protecting wealth through a team of specialists curated for each PCA client’s needs.
In three decades as a financial executive and business advisor, I’ve seen many businesses owners get by just fine for years relying on the information gleaned from their balance sheets and income statements.
The key words there, of course: “get by.”
While you can learn a lot from both balance and income statements, I’ve seen time and again that you can learn far more — and do significantly better than “just fine” for your business — when you add one often-overlooked tool to your accounting and financial processes: cash flow statements.
Yet, fewer than half of small business owners in the United States review their cash flow statements, reports a 2021 survey conducted by eCommerce banker Viably.
I’ve also seen the risks business owners take when they don’t get, understand, or properly utilize their cash flow statements, and the research backs me up: According to statistics cited by nonprofit organization SCORE, the nation’s largest network of expert business mentors, poor understanding or management of cash flow is the reasons 82 percent of small businesses fail.
Now, if you’re reading this, or any other article in our Mind Your Business series, you’re not thinking about failure. You’re thinking about positioning your business, financial, and personal plans so that when you’re ready to sell, pass it to the next generation, retire, start a new company — or whatever you envision for your next life stage — you have options.
Cash flow statements are key to optimizing your plans’ potential and your options.
Essential for tracking — and ultimately improving — your company’s financial health, performance, and cash position, cash flow statements play a critical role in your ability to improve profitability, increase your owner equity, and grow the value of your business.
And just like your company’s balance sheets and income statements, your cash flow statements must check three crucial boxes: They must be consistent. They must be accurate. And they must be timely.
I’ll explain why — and show you how to get there. Let’s start with a few basics.
The Big 3: Balance Sheet, Income Statement, & Cash Flow Statement
Your business’s balance sheet, income statement (aka, P & L sheet), and cash flow statement (aka, CFS) are three of the most important financial statements your accountant, controller, or CFO can and should prepare for you. Each one offers a unique and valuable perspective into your company:
- Your balance sheet tallies up your business’s assets against its liabilities and equity to give you a snapshot of your business’s financial position at a specific point in time.
- Your income statement tallies up your business’s sales revenue and expenses to show you its profit (or loss) over a specified period of time.
- The cash flow statement is a more technical report; it gives you a detailed analysis of how cash moves in and out of your business over that specified period of time.
What Does a CFS Show That Other Financial Statements Don’t?
Whereas a balance sheet shows the financial balance of your company, and the income sheet indicates financial performance, the cash flow statement focuses entirely on liquidity. It indicates your cash position and shows you the amount of cash or cash equivalents coming into and going out of your company. It divides that cash movement among three categories:
- Operating Activities: Shows cash generated or used for your core business operations. Think: profit-making activities and expenses like salaries and wages, sales revenue, payments to suppliers, and interest and income tax payments, as well as changes in working capital levels like inventory, accounts receivable and accounts payable.
- Investing Activities: Shows cash inflows and outflows from your business’s investments in assets, like purchasing equipment or selling property, loans to vendors, or merger or acquisition payments.
- Financing Activities: Shows cash inflows and outflows related to borrowing or repaying loans (debt principal) to or from investors or banks, issuing stock, or paying dividends to shareholders.
Why is Cash Flow Analysis So Important?
By drilling down into the details of how cash is used and generated in your business, and in which areas, you can see how the changes in the accounts on your balance sheet and in the profit or loss on your income statement affect your business’s cash position. That enables you to interpret the “why” and “where” of your business’s performance and financial results.
What do you stand to gain from this information? Provided it’s consistent, accurate, and timely — a lot. For starters:
- Liquidity Certainty: Each cash flow statement gives you a real-time view of your company’s liquidity — whether you have enough cash available to handle short-term liabilities like payroll or loans coming due — and your business’s ability to generate cash and meet obligations, clear indicators of its viability. Remember: Even a profitable business can run short on cash if its leaders don’t properly manage cash flow. Without liquidity certainty, it’s simply too easy to make missteps like overextending on capital expenditures or inventory purchases or allowing an extended delay in a key customer collection.
- Operational Insights: Because the statement breaks down cash flows into three categories — operating activities, financing activities, and investment activities — you can more easily identify which areas are generating cash and which are draining it.This information is crucial for figuring out how and where to focus to improve profitability, operational efficiencies, or capital/debt structure. It empowers you to make more informed decisions, such as whether you should continue capitalizing on certain efforts or must pivot and make changes like reducing expenses, increasing prices, or fine-tuning inventory management to improve margins.
- Better Budgeting and Forecasting: By analyzing past cash flows, you can also make more informed predictions about your business’s cash availability and cash needs in the future, helping you build a plan that ensures you budget appropriately to manage your working capital, cover expenses, avoid a cash shortage, and properly estimate your taxes.(Trust me: It’ll sting if your accountant hands you a 4/15 surprise — an April 15 revelation that he or she underestimated your quarterly payments. But it will (and should) downright burn if you learn that he or she overestimated those payments, diverting into government coffers cash you could have used to invest in and grow your business. Ouch.)
- More Informed Investing & Finance Decisions: Understanding how much cash your business is investing in assets (and generating in returns) can guide future investment decisions, ensuring they align with your company’s strategic goals and, ideally, don’t rely heavily on external financing. Likewise, that understanding will help you better balance and manage your debt and equity financing — both important for your business’s financial stability, profitability, and your ability to drive smart, strategic growth.
- Investor Confidence: Investors and lenders often scrutinize cash flow statements to assess a company’s profitability and viability, as well as your ability to repay loans. Showing a consistent positive cash flow enhances your business’s credibility, demonstrates how well you manage day-to-day operations, and indicates its potential to grow — all factors that can help your business secure funding or loans and position it as a business worth buying. Understanding and being able to articulate your statement of cash flow will build confidence with your investors and lenders.
The Three Keys to Valuable Financial Statements
If you take anything away from this article, let it be this: Every insight and benefit you stand to gain from adding cash flow statements won’t matter one whit — unless your balance sheet, your P&L, and your CFS all check three critical boxes.
Each statement must be:
- Timely: Industry best practice recommends you close each month’s financials by the 10th day of the next month and review them shortly after. A few days earlier or later won’t render any statement worthless, but the longer you wait to receive or review them, the harder it becomes to spot issues or opportunities in enough time to correct or capitalize on them.
- Consistent: Consistency in financial statements is a non-negotiable. If you don’t have consistency, you can’t spot trends in the data. And if you can’t spot trends, you can’t quickly respond to them. So what does consistency in financial reporting look like? Focus on easy-to-understand formats and clear communication, and aim to compare data month-to-month, against prior year data, and against budget or forecasted estimates. Having standardized processes, thorough documentation, and a properly trained team in place will make achieving consistency possible, consistently.
- Accurate: To help determine the level of accuracy in your bookkeeping and accounting processes, ask your accounting team the following:
- Q: How many adjusting journal entries are needed each month to get accurate numbers?
- Q: When significant mistakes are made, are corrective action plans put in place to prevent them from happening again?
- Q: Are you leveraging technology to minimize the number of manual processes happening?
If more than a handful of adjustments are necessary each month, or process improvements aren’t made after significant mistakes occur, that usually means there’s a lack of attention to detail or inefficiencies (a common drawback of many manual processes) at work. Identify whether the issue is with the people or the processes, then adjust accordingly.
Take Action: Steps to Achieve Accurate, Timely, Consistent Financials
Your financial and accounting team and the processes they use are the primary factors that determine how useful and reliable your financial statements are. But there are several changes you can implement right now to improve both factors going forward – and to make the most of the data you’re receiving.
Step One: Create a Month-End Checklist
Ask your financial or accounting team to create a detailed checklist that outlines all tasks necessary for month-end close. Have them assign specific responsibilities to team members for each task. Set clear deadlines to ensure everything is completed by the 10th day of the following month. If certain tasks fall through the cracks or take longer than projected, ask the team to tweak the process to capture and assign (or re-assign) missing or late tasks. Developing a structured approach that works will give your team a clear roadmap for timely completion.
Step Two: Implement a Robust Reconciliation & Review Process
Ensure your team conducts thorough reconciliations for bank accounts, credit cards, and other key accounts to validate that transactions are valid and accurate, and nothing is missing. Assign someone to regularly review reconciliations to catch discrepancies early and maintain the integrity of the data.
Step Three: Perform Regular Financial and Trend Analysis
Ensure that you and your CFO are sitting down monthly to identify and analyze trends you’re seeing in the data. By comparing month-over-month and year-over-year data, you’ll be able to identify any patterns, inconsistencies, or significant variances, so you can investigate the reasons behind them. This regular, structured analysis will make it easier to pinpoint issues and opportunities and quickly respond with an informed decision.
Your Financial Future is in Your Hands
I know that not every independent business owner has a CFO, or even a fractional CFO. I understand that some don’t even have a back-office team. Maybe it’s just you and an accountant or controller right now. Whatever your situation, if you or your current staff lacks the time, bandwidth, experience, or expertise to deliver and analyze accurate, timely financial statements by the 10th of each month, please don’t accept “getting by” as you’ve been.
You have choices to improve the situation: You could upskill your current back-office staff or update its technology. You could outsource all or just some of your current team’s back-office responsibilities to a third-party — one whose contract depends on accuracy, timeliness, and consistency. You could bring on a fractional CFO to analyze and use the data your team delivers to drive your business forward. Whatever you determine you need to do, I recommend you do it as soon as you can.
Remember: You’re reading this article and series to secure and optimize the financial future of your business, your staff, your family, and you.
Getting by with limited, late, or unreliable financial data — or not knowing how to use it to build a stronger business strategy — will cost you far more now and in the future than any change you could make to your people and processes today. Don’t “get by.” Making a few adjustments to get the information you need today is what makes it possible to see and take the necessary steps toward your ideal tomorrow.
About the Author: With nearly 30 years of experience as a chief financial officer — previously for a business consulting firm he co-founded and a $110 million Tier 1 automotive supplier; and today as a fractional CFO to multiple businesses — Tom Shemanski has dedicated his career to the art of proactive financial executive leadership. His specialties: helping businesses of all kinds facilitate rapid turnarounds to profitability and guiding their owners through operational improvements, financing and debt restructuring, ownership transfer, acquisitions, and more. Shemanski leads Rehmann’s CFO Advisory Team.
STAY TUNED!
Next Up: Business Valuations: The Power of Now
Watch your email for the next article in the Mind Your Business series, Business Valuations: The Power of Now. Author and accountant Sladjana Vojcanin, who has conducted hundreds of valuations of businesses and intangible assets for companies in a broad range of industries over 25+ years, will break down what a business valuation is (and isn’t); what to look for (and avoid) in a valuation professional; and when a business valuation can prove pivotal to your succession planning strategy. (Spoiler alert: It’s not when you’d think.)
