Finance for Non-Financial Managers: An Introduction to the Cash Flow Statement

Dave JoneseLearning, Finance for Non-Financial Managers0 Comments

Cash Flow

A short guide to the Cash Flow Statement for Non-Financial Managers…

cash flow


Cash is the oxygen of a business – but it is not the same as profits. Even the most profitable company will go out of business if it fails to adequately manage its cash flows.

profit vs cash

Cash flow’ is defined as the change in net cash (or net loans) over a financial period resulting from flows of cash during that period.

A company’s Operating Profits provide the basis for its operating cash flow.

A business that extends credit terms to its customers will feel a negative impact on its cash flow. However, the opposite is also true. If suppliers extend credit to a company, they will improve its cash flow, as the expenses element in Operating Profit will no longer involve such a large cash outflow.


In capital-intensive industries, expenditure on Fixed Assets (recorded on the Balance Sheet rather than the P&L) can be one of the largest factors resulting in divergences between profits and cash flow.

There are three sources of cash for a business: Retained Profit, new Share Capital and the movement in Net Assets between periods.

Taken together, these three elements change the level of Net Loans held by the business – and are referred to as ‘cash flow’. Net Loans fall when cash flow is positive – and rise when it is negative.

Depreciation is a way of spreading out the cost of an asset across a span of several years, based on cash expenses that the business paid out in the past. As such, it is counted as an expense, and deducted from Sales. It does not impact cash flow directly, but should be ‘added back’ to Retained Profit to help give a more accurate idea of what the resulting cash flows will be.

Cash flows out of a business whenever assets are purchased, hired or leased. So any rise in the level of assets a company holds will result in negative cash flows.

Managing Cash Flows

managing cash flow

In practice, cash flow is usually divided into two different areas: operating cash flow and non-operating cash flow. Each of these is further divided into different sub-areas.

The larger a business is, the easier it can manage issues relating to interest rates and credit ratings. But large businesses must also get the balance right between different operational units.

Businesses manage their cash on a day-to-day basis by controlling cash flows, rather than cash balances as such. One of the ways to do this is by controlling items on the Balance Sheet with a view to maximising Operating Profit.

Calculating Cash Flow

Operating cash flow = operating profit + depreciation – increase in current assets + increase in current liabilities.
Non-operating cash flow = sale of fixed assets – capital expenditure – interest – tax – dividend + new share capital.
Total cash flow = change in net assets + retained profit + new share capital.

Practical Approaches

Providing customers with credit means that in effect a business is providing financing to them – depriving it of the use of the cash for its own purposes. So businesses should extend credit as little as possible.

The more stock or inventory a company has, the more money it has invested in assets that it is just keeping in storage. So stock or inventory should be kept to the minimum practical level.


A business should buy as much as it can on credit from its suppliers, as this is in effect a source of interest-free financing (over the short term). However, this should not be done to the extent that supplier relationships are put at risk.

Companies need to invest to grow. But as investments in fixed assets represent one the largest cash outflows for a business, they need to be carefully controlled.


Companies need to consistently focus on generating as much cash from their profits as they can. In practice, such cash flow management relates to debtors or accounts receivable (e.g. how quickly can customers pay?) and creditors or accounts payable (e.g. how can supplier credit be maximised?)

practical cash flow

General principles for managing debtors (accounts receivable):

  • Agree credit terms in advance. Make them as short as possible.
  • Consider offering discounts for early payments (but factor in discount costs).
  • Minimise bad debts by obtaining credit reports on customers.
  • Ensure your invoices are 100% accurate when sent out (i.e. don’t give customers an excuse to delay payment).
  • Contact customers immediately prior to payment dates to ensure there are no problems.
  • Direct bank transfers are more reliable and quick than cheques.

If you need to deal with accounts receivable who owe you money but are late/reluctant to pay:

  • Call them as well as e-mailing them. Ensure you speak to someone with the authority to make payments.
  • Be persistent – and remain polite at all times. Offending someone does not make them more likely to pay you.
  • Consider using your sales staff as liaisons – their contacts with the customer may be able to help.
  • Escalate your efforts if necessary. This may involve calling senior managers at the debtor, or threatening legal action – or the suspension of future deliveries.
  • Always be ready to re-send ‘lost invoices’, or suggest a handwritten cheque be sent to you if ‘computer systems are down’.

General principles for managing creditors (accounts payable):

  • Make credit terms as lengthy as possible.
  • Consider suggesting the offsetting of balances with suppliers who are also your customers.
  • Prioritise important payments if you are short of cash.
  • Keep track of when large and/or unavoidable payments must be made.
  • Be honest with suppliers you trust if you need to defer payments due to cash flow issues.
  • Reduce the number of your creditors by avoiding unnecessary expenditure whenever possible.

About Brightbolts…

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