Cash Is King
Every SME owner knows and hold the maxim ‘cash is king’ dearly. For startups, and new businesses that are still trying to be cash positive as well as matured businesses with tight cashflows, getting that cash in is the only way to stay alive to live for the next day.
As relevant as it is that the daily bank’s cash ins and cash outs are managed tightly, an often under recognised piece of financial statements is the Cashflow statement. Most SME owners will know and understand the Profit or loss statement and the Balance sheet as it is the most sought-after documents necessary be it for getting credit facilities from banks or doing that tax filing before the end of each November.
Even in the arena for investors for quoted equities, many investors have chosen to ignore the messages of the Cashflow statements. As recent as the debacle of bankruptcy of Hyflux, many have on hindsight, started to question why the red flags exhibited by the negative as well as nature of cashflows in the cashflow statements since 2011 have not managed to get anyone to heed its toes. While accounting profit or the Profit or loss statement is more prone to accounting adjustments relating to Financial Reporting Standards (FRS) application and management assumptions and estimation, the Cashflow statement is less subjected to these manipulations. In fact, the presentation of the cashflow statement using the direct approach (or commonly called the income statement method) which is essentially category of cash inflows and outflows from customers, suppliers, employees etc is the statement that is almost similar to what you would typically see in a bank statement. The benefit of a cashflow statement in direct method is that the cashflow information presented in cash receipts and payments are in a clear and less obscured view vs the commonly Indirect method of cashflow statement which shows the view of profit before tax adding or deducting various operation, financing, investment cashflows before ending up in the final cash and cash equivalents. As it is more complex in getting the cashflows information under the direct method, more reporting of cashflow are usually done in the indirect method. Nevertheless, a cashflow statement in its whatever form be it under a direct or indirect method, provide the SME owners, one effective glimpse of how a business uses and spends its cash. It is indeed none the wiser as the king until you start to understand and appreciate cashflow statement.