Kauffman Founders School, Bill Reichert, TheArt of Startup Finance, Financial Processes: Your Cash Flow So your cash flow statement starts with yournet income at the top.
The bottom line of your income statement is the top line of yourcash flow statement.
So your net income sort of approximates the cash that you earned orlost in your last period, but it's not exactly right.
There's some adjustments that you needto make.
Sometimes when you sell a product to a customer,instead of giving you cash they may wait 30, 60,90 days before paying you.
Now that number,that sort of deferred payment, that's called an account receivable.
But what it means isit did not come into your company as cash.
It gets included in your revenue number, soit seems like it's part of your net profit.
But for cash flow calculations you've gotto reverse out that account receivable in order to figure out what really the cash isthat you earned in this period.
Sometimes entrepreneurs are afraid to bugtheir customers to ask them for money.
But to be honest, it's a just another point ofcontact between you and the customer.
So think of it as an opportunity to engage with yourcustomer, not just as an important opportunity to collect those receivables.
If you let yourreceivables get out of hand, if you let customers defer paying for your products that can eatinto your cash.
And you may not be able to afford that.
Go get those accounts receivableas quickly as you can.
It's critically important for your cash flow.
The other thing that significantly affects your cash flow are your accounts payable.
Again, that's the money you owe to your vendors.
A lot of entrepreneurs sort of manage theircash flow by managing their accounts payable.
And so if their accounts receivable are alittle bit slow, then maybe they'll slow down their accounts payable to try to keep thecash flow level.
So, you know, your net profit, adjusted for accounts receivable, adjustedfor accounts payable, put all of that together and that represents your cash flow from operations.
And that's the core cash flow of your business.
That number is probably going to be prettydifferent than your net income.
And so you want to make sure you understand what's goingon there, analyze why it's different and figure out is there a problem there you need to solve.
Below your cash flow from operations is the cash that you use for capital expenditures.
And then the next part of your cash flow statement is the cash from financing activities.
Andbasically what that means is, if you raise debt or you raise equity that increases yourcash.
If you pay off debt or you buy back equity, that reduces your cash.
You don'treally want to muddy up your business processes, i.
your operations with the cash flow relatedto debt and equity.
So that's why we put it on a separate place in your cash flow statement.
So now you can put all of these things together, look at the revenues at the top of the incomestatement, flows down through expenses to your net income at the bottom of your incomestatement.
That goes to the top of your cash flow statement.
You flow through your cashflow statement to the cash at the end of the period.
That flows over to your balance sheet,the cash at the end of the period in your balance sheet.
So you can see that these threestatements; your balance sheet, your income statement, your cash flow statement, theyall tie together beautifully in the end.
It's really important that you understandthe relationships between these different financial tools.
When an investor comes inthey are going to want to know that you really understand the elements of your income statement,the revenues, the costs, the expenses and how that generates income for your company.
But they also want to make sure that you understand the difference between your net income andyour actual cash flow.
That requires that you really know how to manage things likeaccounts receivable and accounts payable.
Don't just leave it to the bookkeepers andaccountants, because after all it is your business.