CASH FLOW: Shows Your Company’s True Health
By: Charlie Lager, Rock Pond Solutions
For a five-and-dime store, it’s easy to see if it’s getting enough cash flow. Just look inside the cash register.
But when it comes to a Home Infusion Company, the job takes a little more work. Cash Flow should be of greatest concern to your Home Infusion Company. There are three key financial statements that are generally prepared by accountants; the Income Statement (aka the Profit & Loss Statement), the Balance Sheet and the Statement of Cash Flow. We will focus on the Statement of Cash Flow as it gives you a detailed look at where a company is getting its cash to keep running, and how it’s using the funds.
Cash flow is similar to the income statement in that it records a company's performance over a specified period of time. The difference between the two is that the income statement also takes into account some non-cash accounting items such as depreciation. The cash-flow statement strips away all of this and tells you how much actual money the company has generated. Cash flow shows us how the company has performed in managing inflows and outflows of cash and provides a sharper picture of the company's ability to pay bills and creditors, and to finance growth.
The Statement of Cash Flow divides cash flow into three categories: from Operations, from Investing activities and from Financing activities.
Cash Flow from Operations:
This represents the cash flow from the primary business which for our purposes is Home Infusion Revenues and Expenses resulting in Net Income. Positive cash flow from operations is generated when billings collected are greater than expenses disbursed. Negative cash flow can result from exceedingly rapid yet profitable growth, in which expenses must be paid before receivables are collected. Cash flow from operations takes into account non cash items such as depreciation and amortization. It also reflects changes in accounts receivable.
Cash Flow from Investing Activities:
Investment in non-current assets such as rental equipment, vehicles, furniture and other capital equipment provide benefits for many years. This type of expense is not immediately reflected in the company’s income statement. It is recognized over time through depreciation.
Cash Flow from Financing Activities:
This is cash received from issuing (selling) equity or borrowing of funds. Increases in debt or the sale of stock during the period, which are not reflected in operating net income, add to the company’s cash flow. Repayment of debt or the payment of dividends, which are also not reflected in the operating income, reduce cash flow. The aggregate of these different types of cash flow represents the net cash from financing activities.
Why is cash flow so important? Unlike reported earnings, there is little a company can do to manipulate its cash situation. Besides in cases of outright fraud, this statement tells the whole story - a company either has the cash or it doesn't. The cash flow statement requires just as much attention as the other statements. At the very least, look to see if the company is increasing cash over previous years.