Balance Sheet Walk

All three of the key financial statements, the Income Statement / Profit and Loss, Balance Sheet and Cash Flow statement shed some light on business cash flows.

The Income statement gives an indication of the maximum cash flows possible for the business from the sales and expenses incurred during the period under consideration.  However  the actual flow of cash is not revealed in the income statement. The profit shown on the Income statement is the book profit earned, but unless it is a cash only operation the profit will probably not have all been received (or paid) in cash. For example, some of the sales on the income statement will have been received as cash. The balance will be an amount that is still owing and will be shown on the Balance Sheet as Accounts Receivable.  Also, some of the expenses will have already been paid, but some will usually not have been paid yet. The balance is still owing and will be shown on the Balance Sheet as Accounts Payable.

The Balance sheet shows the cash that was not collected or the cash that is owing but not yet paid. The Cash Flow statement shows the cash flows from operations (cash received from customers, cash paid to suppliers and staff), from financing activities and investing activities. In other words the Cash Flow statement reports the timing for actual cash flows received and paid by the business.

A business can show a profit on the Income Statement but be unable to continue trading because there is no cash available when needed. For example if you can't pay wages or pay suppliers on time then a good looking Income Statement profit won't help.

Timing of cash receipts and payments is a key component for managing business cash flows. Accurate cash flow forecasting is paramount for survival and is best achieved with the aid of adequate Cash Flow software