Talking Dollars & Making Sense: The Importance of a Cash Flow Statement for Entrepreneurs

Sep 22, 2024 Features / Columnists, News

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Kaieteur News – Welcome back to Talking Dollars & Making Sense. Today, we’re going to focus on one of the most important, yet often misunderstood, financial tools in business—the cash flow statement. If you’re an entrepreneur, understanding your cash flow is crucial to keeping your business afloat and planning for future growth. Whether you’re running a small startup or a growing enterprise, knowing how money flows in and out of your business is key. And don’t worry—I’ll explain it in simple, practical terms using Banks DIH Limited as a real-world example to make things clearer.

What is a Cash Flow Statement?

A cash flow statement is like a health check for your business’s finances. It tracks all the cash that comes in and goes out over a specific period, usually monthly, quarterly, or annually. While an income statement tells you about profits and losses, and a balance sheet shows your assets and liabilities, the cash flow statement is the only one that shows whether your business actually has cash on hand.

For entrepreneurs, this is critical because, at the end of the day, businesses don’t run on profit alone—they run on cash.

Why Is the Cash Flow Statement Important?

The cash flow statement is essential for several reasons:

It Shows Liquidity: Liquidity is your business’s ability to meet short-term obligations—paying rent, employees, or suppliers. Even if your business is profitable on paper, you might run into trouble if you don’t have enough cash to meet these obligations.

It Helps with Financial Planning: Entrepreneurs use cash flow statements to predict when they’ll need more cash or when they might have surplus funds for investment. It also helps identify periods of high cash demand, allowing you to plan accordingly.

It Attracts Investors: Investors are particularly interested in a company’s cash flow because it shows whether the business is generating enough cash to fund its operations and growth. Positive cash flow is a good sign of financial health.

Now that we understand why cash flow is essential, let’s break down the three main components of a cash flow statement.

The Three Sections of a Cash Flow Statement

A cash flow statement has three key sections:

Operating Activities

Investing Activities

Financing Activities

Let’s look at each section in detail and use Banks DIH Limited’s 2023 Annual Report to illustrate these points.

1. Cash Flow from Operating Activities

This section tracks the cash generated or used by your business’s core operations. It answers the question: “Is my business generating enough cash from its normal operations to cover expenses?”

For Banks DIH, their cash flow from operating activities for the year 2023 was $20.5 billion. This number represents all the cash that flowed in from selling their products—like beverages, food, and services—and subtracts operating expenses like wages, inventory costs, and taxes.

Operating cash flow is often considered the most critical part of the cash flow statement because it shows whether the company can sustain itself with its day-to-day business. For entrepreneurs, keeping an eye on this figure is key. If you’re regularly spending more than you’re earning from operations, you’ll need to either cut costs or find new ways to boost sales.

If your operating cash flow is negative for an extended period, it could mean you’re overspending on day-to-day expenses, or sales aren’t covering costs. This should trigger a review of your pricing, cost structure, or even customer collection policies (how quickly you’re getting paid).

2. Cash Flow from Investing Activities

This section shows the cash used for investments in the business. This could be buying new equipment, upgrading facilities, or making other long-term investments. It also includes any cash inflows from selling assets.

For Banks DIH, their cash outflow from investing activities in 2023 was $9 billion. This large outflow is mostly due to the company’s capital expenditures, such as purchasing new brewing equipment, trucks, and plant upgrades to support future growth.

Investing activities are usually negative because companies are investing in their future. However, for entrepreneurs, it’s important to monitor these investments and ensure they are generating value. If you’re spending too much on investments without seeing a return, you may run into cash shortages down the road.

If you’re planning to invest heavily—like buying new equipment or expanding your business—make sure you have enough cash flow from operations or financing (like loans) to support these investments without draining your cash reserves.

3. Cash Flow from Financing Activities

This section covers the cash that comes in or goes out due to financing activities. This could be cash raised from loans, raising capital from investors, or payments made to repay loans and pay dividends to investors.

In 2023, Banks DIH’s cash flow from financing activities showed an outflow of $20.1 billion, which primarily included dividend payments to shareholders and loan repayments.

For entrepreneurs, financing activities are a critical part of managing cash flow, especially in the early stages of a business. Whether you’re borrowing money or raising equity, this section shows how you’re funding the business. If cash from operations and investing activities isn’t enough, you’ll need to look to financing to make up the difference.

If you’re relying heavily on financing to fund your business, be mindful of your debt levels. While borrowing can help you grow, taking on too much debt without generating enough operating cash flow can strain your business. Keep an eye on your loan repayment and interest rates.

How Entrepreneurs Use the Cash Flow Statement

Now that you understand the components of a cash flow statement, let’s talk about how entrepreneurs can use it in day-to-day decision-making:

Tracking Cash Gaps: If you know a big expense or investment is coming up, use your cash flow statement to ensure you have enough funds. If not, you may need to delay the investment, cut costs, or seek financing.

Managing Working Capital: The cash flow statement helps you see how well you’re managing working capital—your receivables (money owed to you), inventory, and payables (money you owe). Improving collection times from customers, for example, can boost your operating cash flow.

Forecasting Future Needs: By examining trends in your cash flow, you can predict future cash needs. If you notice cash from operations is consistently low, you might want to rethink your business strategy—whether it’s cutting costs, increasing sales, or securing new financing.

Avoiding Cash Shortages: One of the most common reasons businesses fail is not having enough cash on hand. Regularly reviewing your cash flow statement helps you avoid surprises. It ensures you have enough liquidity to cover short-term expenses and make smart financial decisions.

The Bottom Line

The cash flow statement is a powerful tool for every entrepreneur. By understanding how money moves in and out of your business, you can plan better, make smarter decisions, and avoid the cash flow crunch that can sink even profitable businesses.

Take a page from Banks DIH Limited’s playbook. Their strong operating cash flow of $20.5 billion in 2023 ensured they could invest in growth and pay dividends to shareholders, all while maintaining financial stability. As an entrepreneur, the more you understand your cash flow, the better equipped you’ll be to steer your business toward success.

Until next time, keep an eye on your cash flow, and remember: in business, cash is king.

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• Banks DIH Limited, cash, entrepreneurs, Rennie Parris, statement

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