Situation: A CEO is familiar with and regularly uses income statements and balance sheets in financial discussions and planning. However, cash flow statements present more challenges, particularly when comparing cash flow over time. A second question is whether cash flow statements are more important to C versus S corporations. How do you best use cash flow statements?

Advice from the CEOs:

• Most companies use the P&L and Balance Sheet to “stay on top” of the business on a short-term basis. However, these statements do not provide detailed insight into where cash is coming from and where it goes.
• The cash flow statement represents a tracking tool to highlight trends and make projections about important changes in financial flows. All three financial statements are used to plan and monitor performance against the company’s financial targets. However, the cash flow statement is the most meaningful of the three, regardless of business size.
• If 1/3 of a company’s expenditures is fixed cost how does this impact planning?
  • Carefully watch changes in volume over time and the impact on cash flow before deciding to expand.
  • When deciding whether to commit new resources it may be wiser to allow finances to be stretched for a while or even to turn down some marginal business opportunities before committing to a new layer of expenses.
• The cash flow statement is not really affected by the corporate structure, since its three areas of focus – operations, investment, and financing – are common to all three.
• Business is getting more complex. It really pays to understand the key elements that drive the business, and their impact on cash.

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