The third financial statement (out of 3) is a bit of a mythical unicorn…
No one really knows how to read it or what to do with it.
Let’s put an end to that…
Let’s say we just closed out the year and we’re looking at the income statement to see how we finished. Sales were $1m and net profit was $100k. Nice.
Then we pop open the bank account only to find we started the year with $80k and finished with $70k.
Somehow we made a $100k profit while cash went backward by $10k.
This feeling (and frustration) is all too common in business ownership, but it’s a golden rule of financial management: profit does not equal cash flow. Never has, never will.
Fortunately, there’s this magic report which literally reconciles it all. Like the Rednex famously proclaimed about cash flow in 1994: “where did you come from, where did you go?”
Here’s where we’ve been in this multi-part breakdown of reading the financial statements:
In Part 1, we looked at the income statement (earnings power)
In Part 3 (today), we’re covering the cash flow statement (sources & uses of cash)
TL;DR
The cash flow statement reveals the sources (inflows) and uses (outflows) of cash
Profit ≠ cash flow — you can make money and still run out of cash
This financial statement reveals “where our profit went” (i.e. reconciles profit-to-cash) and highlights the 6 key drivers for generating cash flow
