A measure of how well your company did is the cash flow.

However, here is what the cash flow is not: it is not the change in your cash balance.

Recently I helped a manufacturing company find a new Director of Finance.  After he had been there a month, I went out to visit them.  He mentioned that his predecessor did just that in the monthly management meeting where management reviewed the prior month financials.  He used the change in cash balance as the cash flow number.

Here is why it does not work.  There are three main areas that can affect cash:

1.    The cash you generated or spent from operations.

2.    What cash you spent on capital expenditures (or gained from sale of capital items).

3.    How you financed the above transactions through equity or debt.

Of the three, what counts as cash flow is the first item, what you generated from operations.  This includes your net income (after adding back non-cash items like depreciation) and the changes in working capital (receivables, inventory, payables and other items).  If you made money during the month, but it all went into building up your working capital, then you did not generated any cash flow that month.  Ultimately, your net income needs to exceed your working capital growth; otherwise you never generate cash flow.

If you have a very capital intensive business, where equipment is bought regularly, almost like inventory, you might consider this part of the cash flow generated number.  For most companies, this is not the case, so this is left out of the number. 

How you finance your company does not count as cash flow from the business.  That’s an outside transaction.

Know what cash you are generating from operations.  It isn’t the change in your cash balance.  Knowing this number gives you an important benchmark on how well you are really doing.