For HR to be most effective, you should understand how the business side of the organization works. HR won’t earn a permanent seat at the decision-making table without a clear understanding of what’s behind the finance team’s decisions and strategies—including basic financial reports. Let’s take a look at the cash flow statement as an example.
Understanding Cash Flow Statements
As the name implies, the Statement of Cash Flows shows the flow of cash in and out of the business. The purpose is to show the pattern of income and expenditures of a company, and the resulting availability of cash. It shows the available financial resources and management’s use of them. This information can help in evaluating a company’s liquidity.
“The purpose of the cash flow [statement] is to provide information on a firm’s liquidity and solvency and its ability to change cash flows in future circumstances. So, it gives you an idea of the amount, timing and probability of future cash flows as well.” Teri Morning explained in a recent BLR webinar. It lets you see more information beyond just the assets of the company. It provides additional information for evaluating changes in assets, liabilities and equity.
“A cash flow statement has three major groups of activities: operating activities, investing activities, and financing activities.” Morning told us. So the cash flow statement is partitioned into three segments:
- Cash flow resulting from operating activities
- Cash flow resulting from investing activities
- Cash flow resulting from financing activities
Understanding How Cash Flow Statements Are Used
“If a company is consistently generating more cash than it is using, the company will be able to increase its dividend to its stockholders, which makes it more attractive and its stock price goes up. It could buy back some of its stock, it could have more control over the company, it could reduce its debt, or it could acquire another company. Investors like to see cash. If cash from operating activities is consistently greater than the net income, the company’s net income or earnings are said to be of a high quality.” Morning told us.
On the other hand, if the cash from operating activities is less than net income, a red flag is raised as to why the reported net income is not turning into cash. Cash flow problems are one of the main reasons for failure of small business; a problem with cash flow could show a company’s inability to pay its bills.
For more information on how to understand cash flow statements, order the webinar recording of “Finance for HR: What You MUST Know to Secure Your Seat at the Business Table.” To register for a future webinar, visit http://store.blr.com/events/webinars.
Teri Morning, MBA, MS, SPHR, SPHR-CA, is the president of her own HR consulting firm. She has over 15 years human resource and training experience in a variety of professional fields, including retail, distribution, architectural, engineering, consulting, manufacturing (union), public sector and both profit and non-profit company structures.