Finance for Non-financial Managers

3. Cashflow

Cashflow is the short-term priority for every business. If you run out of cash (and cannot raise additional finance), the company will be insolvent.

3.1 The cashflow statement shows what has happened to your cash position over the accounting period.

• 'Cash' includes money in the bank.

3.2 The cashflow statement differs from the profit and loss statement because it shows the timing of payments and receipts.

It can be prepared by adjusting the profit and loss statement for 'non-cash' items. Typically, these include:

• Depreciation.
• Changes in debtors and creditors.For example, if the amount you are owed for sales has increased, your cash position will be reduced.
• Financing activities (eg new loans).

3.3 The cashflow statement can look complicated but carries a simple message.

It tells you whether your business is generating cash or using it up.

• A mature, profitable business will usually be cash generative.
• A younger, growing business may be using up cash even if it is profitable. The business may need to raise additional finance to keep growing.