Now we get to talk about the third component in your cash flow toolkit – the GAAP cash flow statement.
In Part 3 of this series, we looked at what I call the Peace of Mind Schedule.
Tool Number Three
The third part of our toolkit is the cash flow statement that is required by Generally Accepted Accounting Principles (GAAP).
GAAP requires a “statement of cash flows” as part of reporting a full set of financial statements. You will normally see that statement when a CPA firm provides financial statements as part of an annual review or audit of financial statements.
There are basically two approaches to creating the cash flow statement: the direct method or the indirect (or reconciliation) method.
The indirect method is the most prevalent. It basically “reconciles” net income to the change in cash for the period.
Great tool for accountants. But horrible tool for business people.
The Smart Way to Use the Schedule
I use this a little different than the first two tools we looked at.
I use the GAAP cash flow statement primarily for its “nerd” value. By that I mean the audience for that statement is generally the financial types within our lender or investor groups.
It is not the most intuitive part of a full set of financial statements but the accountants and financial analysts within that audience like it and understand it. They are used to receiving it and analyzing it.
So it’s smart to make sure it is a part of your monthly financial reporting package.
Remember, our primary goal here is to make it as easy as possible for management, lenders and investors to quickly see and understand the company's cash flow and ensure they have confidence in the information we are providing them.
Part of achieving that goal is to take care of the nerds amongst that group.
If you don't provide it to them they will feel like you are falling short in providing them financial statements prepared in accordance with GAAP. And there is no reason to create a problem like that.
So if certain people like it – let’s provide it.
A Credibility Opportunity
Another benefit of providing it is you can use it as an opportunity to help your CEO understand the basics of how the GAAP cash flow statement works.
It’s not a huge deal, but in certain circumstances, helping your CEO understand how the statement works can help them as they talk to, and relate to, certain lenders and investors. That can be a very compelling way for a CEO to create confidence in the minds of investors and lenders.
The lenders and investors can see that the CEO understands the financials and they can see that the management team is a knowledgeable group of people focused on creating a company that can win financially in business.
It can help build credibility and trust with people who are very important to your future financial success.
EXAMPLE: I have two views of the GAAP cash flow statement in my Monthly Confidence Package example. Take a look at it and you will get a great idea of how to use it each month.
The Real Secret
My next post in this series will focus on how to answer the all-important question: “What’s about to happen to the cash”.
I will show you how to use the three tools to create cash flow projections you can trust.