The number one job of a CEO is to make sure his company doesn’t run out of money.

- Peter Kurzina, senior lecturer @ MIT Sloan School of Business

That’s it! Closing more deals, generating more leads, making sure the product remains best-in-class, fostering a productive work culture, growing revenue – those are all secondary concerns for the CEO of any business, compared to ensuring that there is cash left in the bank.

When put that way, it is easy to see what the number one metric that CEOs should look at each week is – cash flow. Cash flow analysis and management means figuring out how much cash is coming in, how much is going out and, most importantly, why.

The difference between Direct and Indirect Cash Flow Statements

What makes figuring out your Cash Flow statement particularly difficult is that there are two primary methods of doing so. Both methods begin at different points, but arrive at the same conclusion when accounting for operating cash flow. The two methods are:

Direct – identifies a company’s sources of cash inflow and uses of cash outflow, starting with cash received from customers. Direct cash flow statements usually include three sections:

  • Operating – receipts and payments from normal business operations (wages, vendor payments, etc)

  • Investing – the purchase or sale of long-term assets and investments.

  • Financing – borrowing money from and making payments to creditors, shareholders and investors. For example, if you borrow money from the bank, that will be represented as financing-related cash.

Indirect – does not include as much information as the direct method. Companies who use this method start with their net income, as reported in the income statement, and then subsequently works backwards and makes adjustments to this original figure. The adjustments will take into consideration all non-cash items – including credit payments – and eventually converts the total net income to an actual cash amount. Think of the indirect method as converting from an accrual-based income statement to a cashed-based income statement. An indirect cash flow statement might represent a better income number, but doesn’t contribute to actual cash flows.

Most companies rely on the indirect method for two reasons – it’s the only way to do a cash flow statement in Quickbooks, and is easier to prepare since all the financial information is already at hand. While this is generally fine, the Financial Accounting Standards Board (FASB) prefers the direct method. It is more straightforward – accounting for tangible cash inflows and outflows – and the resulting statement is easier for business stakeholders and investors to read and digest.

Companies looking to prepare their cash flow statement using the direct method in Quickbooks are stuck up a creek without a paddle. What can they do?

Quickbooks Analytics with InsightSquared

The Cash Waterfall report is one of our newest Quickbooks Analytics reports that provides a full picture of the direct cash flow statement. This report allows CEOs – along with CFOs and accountants – full visibility into their cash flow for any given time period. This tells the CEO literally everything that happened involving a cash transaction over the past week. All of the cash that flows in and out of the company is tracked in this report.

As you can see from this fictional company’s Cash Waterfall report, it is very expensive to run a company. There are all sorts of expenses that contribute to the daily operation of a company. Paying third-party vendors, utility companies, bank services, cleaners and insurance providers are all substantial expenditures that require the company to dip into its bank account. This is all without even bringing up salary, typically the largest “Cash Out” expenditure for any company.

While incoming revenues help offset these costs, they are also not as consistent as the expenses that companies accrue every single week. It is absolutely imperative that CEO’s not let their companies run out of cash, or even come close to it! They need to look at the Cash Waterfall report on a regular basis (at least once a week) and reconcile those incomes and expenditures with the amount of cash they have in the bank.

If a company has just successfully completed a round of funding, that injection of cash is probably enough to keep them flush for a while, regardless of cash inflows and outflows. However, what if the company is a young startup that has spent most of its liquid funds? At that time, the CEO might scrutinize the Cash Waterfall report a little more closely and start asking tough questions about what the company really needs to spend money on.

 

Whether your company is flush with cash or counting its last pennies, it is critical to maintain an ever-watchful eye on your cash flow. A direct cash flow statement provides a more valuable and well-rounded view of a company’s cash inflows and outflows. Can’t do that in Quickbooks? Turn to the Cash Waterfall report in our Quickbooks Analytics product here at InsightSquared for help.

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