I was reading an article about Groupon’s problems on CFO.com, “Groupon’s Use of Non-GAAP Measures Questioned,” which questions where Groupon’s cash is coming from, “Are the cash flows coming from the liquidation of receivables? Are they coming from the sale of something? Or are they coming from the fact that [Groupon] didn’t pay its bills?” The point being that Groupon’s cash flow statement is somewhat unclear, which presents a problem to strategic planning and management. I firmly believe the cash flow statement is key to understanding what is going on at your business, so what’s your statement of cash flows telling you?
Non- financial executives often look at the success of a business more on a cash basis than the accrual, “accounting-rule-basis” of GAAP financial statements. In other words, where the cash went and came from makes a lot of sense to management. The cash flow statement starts by eliminating the non-cash items that are affecting net income and gets right into areas of operations. The operations section ties net income to the changes in the balance sheet. For example, generating revenue can produce cash, but it can also mean that accounts receivable has increased and the company is still waiting to collect the cash. If the company has an increase in payables, it has held on to cash, but has future liabilities that in all likelihood will have to be paid, which takes us back to concerns around where Groupon’s cash is coming from (concerns, that any financial statement user would have of any other company, too).
I frequently have the opportunity to present financial statements to Boards and Committees comprised of people from various backgrounds, and one of the areas where I try to direct the focus is the statement of cash flows. This often overlooked statement is an excellent summary of what happened in the business for the last year, and is a good starting point for planning future cash flow needs.
If you have any questions about cash flows and the cash flow statement, feel free to ask it in the comments section – I love to talk about it!