© John A. Tyler
Do we know where the money went?
Many businesses budget their expected income and expenses for the next fiscal year, and make policy decisions based on forecast results. In these unpredicted times, and liquidity squeezes, keeping cash reserves is essential. And computer prepared financial statements will easily compare actual results to bugeted forecasts. But a cash activity
report comparing actual results compared to expectations is not generally present.
Why not? Because the Financial Statements do not include a clear cash activity report !
Typical financial statements used by businesses include a Balance Sheet, an Income Statement, and a Statement of Changes in Cash Flow, which attempts to show the reasons for changes in cash balances over a specified period of time. However, this statement is a hybrid. The first line in the report is not cash balance at the beginning of the
fiscal period.
The first line is Net Income or Loss, and the subsequent lines include some useful information, and some not so useful, such as “Net Changes in Accounts Receivable,” or “Net Changes in Accounts Payable.” If a business manager is trying to track customer payments against a budget, the standard cash flow statement does not identify customer cash payments.
How do we solve this dilemma ?
There is a format which I called a Direct Cash Flow Statement.
This statement might look like this:
|
XYZ Company Statement of Direct Cash Flow
|
Actual To Date
|
Budget To Date
|
Actual Versus Budget
|
|
Cash Beginning Balance
|
237,830
|
237,830
|
|
|
Cash Received
|
|||
|
Customer Payments
|
1,300,000
|
1,750,000
|
(450,000)
|
|
New Bank Loans
|
|||
|
Total Cash Received
|
1,537,830
|
1,987,830
|
(450,000)
|
|
Cash Spent
|
|||
|
Net Payroll Paid
|
850,000
|
750,000
|
100,000
|
|
Payroll Taxes Paid
|
230,000
|
212,000
|
18,000
|
|
Bank Loans Repaid
|
50,000
|
150,000
|
(100,000)
|
|
Payments to Vendors
|
275,000
|
300,000
|
(25,000)
|
|
Purchases of New Equipment
|
200,000
|
120,000
|
80,000
|
|
Occupancy and Maintenance
|
62,000
|
62,000
|
Total Cash Spent
|
1,667,000
|
1,594,000
|
73,000
|
|
Cash Balance, End of Period
|
108,660
|
631,660
|
(523,000)
|
|
Change in Cash During Period
|
(129,170)
|
393,830
|
(523,000)
|
Is this good news or bad news ? We need more information to find out.
It may mean that our sales have substantially increased, and we have had to increase inventory in anticipation of new sales. It may mean that our customers are having their own hard times, and have lengthened their payment dates. What the statement of Direct Cash Flow, where actual results are compared with budgeted expectations does tell us, is there is a significant difference between budgeted cash flow and actual results, and we need to find out why.