You’ve got your monthly financial statements. You see how much money is being made, but where is that money really going to.

Is it going to you or is it going elsewhere? Is it getting plowed back into the business into working capital or capital expenditures? Is it going out to the bank?

Knowing where the money flows helps to really answer questions. Is the company working for you and generating the income or are you really having to work for the company?

There are three main areas to look at on the cash flow:

1. Cash flow from operations. This represents how much money the company has earned. That’s how much is being plowed back into the operation, in particular for working capital and mainly receivables and inventory offset by accounts payable.

2. Capital expenditures. Money’s being spent on long-term assets in the business.

3. Financing. Is money being used to pay off bank debt or other related financial payments?

Know how you stand on those three legs of the cash flow. That will give you a clue as to whether the company’s really increasing in cash or if the cash is being diverted for other purposes so that you’re really working for somebody else.