When I ask to see the financial statements at a company, most often I get the following:

 

·         Income statement

·         Balance sheet

 

The most important of all is usually left out - the cash flow statement.

 

Cash flow is the lifeblood of the company.  Net income is important, but that may not tell the whole story:

 

·         A company could have positive net income, yet at the same time bled cash due to investments in receivables, inventory, capital expenditures or paydowns on debt.  The company may be in worse shape than they were the year before.

·         On the other hand, an established (rather than a startup) firm that had a net loss could be better prepared to face the future if they have generated cash by cutting their investments in working capital or other areas. The cash generated could allow them to make the moves to get back on track.

 

The balance sheet helps fill in the picture, but it makes you have to work a bit.  The cash flow statement, on the other hand, can leap right at you by telling you:

 

1.     What cash you generated from operations.

2.     What cash was spent on capital expenditures and other long term assets.

3.     How the above two items were financed or how the cash generated was used to pay down financing.

 

Cash doesn’t lie.  It can be a strong barometer of the health of a company.  You can see whether a company is on the rise or will face financial issues.

 

If you are looking at a company and they don’t give you the cash flow statement when you ask for the financials, that can be a signal about their financial management.  Conversely, include the cash flow statement in your financial package and you look sharper to your banker.

 

Remember the cash flow statement.