Cash Flow Reporting (there must be a better way...and there is)
- Ed Patton
- Jul 16
- 2 min read
Updated: Jul 17
Many small to mid-sized business executives do not understand their company’s cash flow – this is a significant problem.
A major reason cash flow is not comprehended is because...when it is reported...it is usually presented in a very confusing way...which is the GAAP "indirect method" of cash flow reporting.
For decades, this method has been used, dissected, written about, explained, etc, etc.
In spite of all of this examination, analysis, etc, it continues to be ineffective and hard to follow, even for experienced and financially savvy business leaders.
It is high time to rethink cash flow reporting for SMB executives.
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Cash flow is easier to understand when it's calculated using the three common sense categories summarized below.
Start with:
A) Ops Earnings (generally EBITDA) as opposed to starting with net income.
Then, segregate the remaining two categories of cash changes into:
B) Non-Ops items; and
C) Working Capital items
Net of A + B + C = cash changes (i.e., cash flow)
Notes:
Changes in working capital items are different than, and not a part of, a business’s earnings…a cash flow statement mixes “apples and oranges” when cash changes from working capital items are commingled with earnings.
I believe that combining earnings and working capital amounts...in the same category...significantly contributes to the inability of many business leaders to understand their company’s cash flow.
fyi…the sum of Ops Earnings {item A) above} and Non-Ops components {item B) above} is termed Foundation Cash Flow™ (FCF).
Comprehending FCF unlocks important business insights.
Additionally, FCF is that “mythical” amount of what cash flow would be if working capital items did not exist because they are settled instantaneously as business activities occurred….no A/R; no A/P; no Inventories.
The insights derived from FCF are enlightening.
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This new and effective method, pioneered by the Trender® Platform, has successfully helped many SMB executives comprehend their company’s cash flow.
It is time-tested and has been thoroughly real-world-tested with multiple companies, in various industries over many years.
Reach out for an introductory phone or video call to discuss how clear, concise and intuitive financial fundamentals, including cash flow, have helped the leaders of many privately owned businesses better comprehend their company's history, status and future.
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Edward B. Patton
5701 Broadway, Suite 102
San Antonio, Texas 78209
Phone (210) 822-9977
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