What it's all about: Cash Flow!

Newsletter #11

One month into having my own business- lots of lessons learned and moments of self-reflection, but loving every minute of it (so far!).

A big part of it is just how quickly you can move and adapt, something very different than working at a bank.

One of these “adaptations” is that I now also offer one-off projects to help businesses that don’t need a Fractional CFO yet.

The latest addition is a “Full Financial Health Boost”. For this I’ll be doing an in-depth check under the hood to make sure all financial processes are optimized and no hidden risks are looming around the corner.

We’re dealing with enough uncertainty in Ag already. So this is aimed to show exactly where you stand and it includes personal recommendations to work on.

Still offering it at a discount 🌷 : https://www.perennialcfo.com/financial-health-boost/

In the last two weeks, we dove into the Income Statement and the Balance Sheet. Today, we'll cover the Cash Flow Statement and how it completes the financial picture of your business.

The Cash Flow Statement is in a way the connection between the Income Statement and the Balance Sheet. And with this connection, it comes close to reducing the limitations of the other statements.

Because what this statement essentially tries to do is remove the funny accounting rules from the income statement (like the accrual/matching rule to record revenue/costs when incurred, instead of when paid, and all non-cash expenses like Depreciation).

And at the same time, it shows how the numbers on your balance sheet changed over time.

Always a limitation

But I wouldn’t just let you think this answers all your questions. Because one issue I still have with the Cash Flow Statement is that it only shows that cash is spent or received, but not necessarily why. Like, did inventory increase because there is more demand, or because you’re stuck with stuff that doesn’t sell!

Still, it provides valuable insights into how your business generates and uses cash, so it’s worth paying attention to!

The Cash Flow Statement Explained

1. The first section is Operating Cash Flow

   This section captures the cash generated from your core operations. It starts with your Profit from the Income Statement, and then adjusts this for:

   • Any “non-cash” expenses like Depreciation

   • Any Working Capital (Receivables/Payables/Inventory) changes

   • Any other operating cash flows where relevant

   This section is KEY as it tells you: is your business bringing in cash?

2. The second section is Investing Cash Flow 

   This reflects cash flows related to investments in assets. For example, when you purchase new machinery or acquire land, these cash outflows are recorded here. The same goes for when you sell assets or land.

3. The third section is Financing Cash Flow
   This is the cash flow related to financial activities. This includes taking on new loans, repaying existing debt, and transactions involving equity, such as issuing shares or paying dividends.

   If your Business Operations don’t bring in enough cash to pay for your required capital expenditures, then you would need to bring in external financing.

   If on the other hand, you do make enough money to pay for all of your machinery and expansion, then you might be able to pay out some of that cash (or keep it in the business to reinvest later).

The agricultural twist:

• Working Capital: seasonality is here again! Pay very close attention to your Receivables, Payables and Inventory changes in the Operating Cash Flow section.

  Because when you don’t have the luxury of receiving cash every month, then this is where you are most likely able to make some changes to “free up” any cash when you need it.

• Capital Expenditure (Investing Cash Flow) & Depreciation (Operating Cash Flow): you can’t operate without machinery. And when machinery deteriorates, so does your financial performance.

  That is why you ideally keep replacing old machinery (when required!!). So when depreciation is high, you will likely also require a higher Capital Expenditure. A good point to watch!

• Debt Servicing (Financing Cash Flow): it’s not uncommon to rely on debt in this industry. While there are better ways to keep track of your debt, it does not hurt to look at it in the Financing Cash Flow section to see all movements.

Understanding the Cash Flow Statement is the first step to understanding how cash flows through your business.

Ultimately, it helps you to identify areas where cash inflows can be maximized or cash outflows can be reduced, all with the goal to improve your financial resilience!

The financial statements can be pretty baffling.

If you feel like your statements (and wider business) might need a “banking-level” review for you to keep operating with confidence-

then it wouldn’t hurt to take a look at this:

https://www.perennialcfo.com/financial-health-boost/

Till next week!

Joey 🌷