It’s a conundrum often considered by florists—how can I have profits being taxed, but not have the cash available to pay them? With most of us filing tax day into the past, you may want to keep that pile of paperwork out for one last look. Not for Uncle Sam—but to see if you have enough insurance coverage for your floral operation.
As Hortica Retail Sales Specialist Maria Shepherd found out, many business owners only look at the balance sheet and the profit and loss report. But you also need to check out a third crucial piece of the puzzle—your cash flow statement.
So, just what is a cash flow statement? Simply put, it shows the effects of profit and loss on your business, as well as the changes in your assets and liabilities. That determines how much cash you have available. Derrick P. Meyers of the financial management and accounting firm Crockett, Myers and Associates took a closer look at cash flow statements. He found a few key things to understand:
Cash Affected by Operations: This calculates the effect the current operation has on cash flow. If it’s negative, it’s cash used for operations. If it’s positive, it’s considered cash provided by operations. In other words, if inventory is increased, cash is spent. If accounts receivable goes down, cash is on hand because you collected on outstanding bills.
Cash Affected by Investing Activities: Cash spent on investments like buying equipment, buildings or even stock in another company reduces what cash is available. Selling an investment increases cash.
Cash Affected by Financing Activities: This is what comes into play with most businesses and has the biggest impact on the notion that profit is the same as cash. Paying things like bank loans, business credit cards and other debt reduces your cash on hand—but leaves your profit intact on the statement. That’s why some florists have no cash, but still have profit.
There are ways to avoid cash flow challenges. In Meyer’s article “Cash Flow Catch-Up” in the March 2016 issue of “Floral Management” from the Society of American Florists, he suggests keeping track of the changes in your inventory, accounts receivables and accounts payable. That way you get a sense of the times of year when there’s more cash or less and can budget accordingly. You should also avoid relying solely on your bank balance to see how business is going.
By understanding your financial statements and how cash flow works, you’ll have a better chance of avoiding the question “Where’s my cash?” when you need it. But a cash flow statement isn’t just for determining your company’s financial strength; it’s also a good reminder to check your insurance coverage. Any time you have an increase or change in inventory, equipment or buildings, you may need a property adjustment in your policies. A Hortica specialist is ready to sit down with you to discuss your business needs and offer some solutions.