Nathan Liao, CMA on LinkedIn: 🚨Top 4 Cashflow KPIs Never run out of cash 👇 There's a report that… (2024)

Cash Flow Statement

Top 4 Cashflow KPIsNever run out of cash 👇There's a report that often remains in the shadowsIt helps gauge the health & viability of a businessIt’s the Statement of Cash Flows (SCF) SCF has a tremendous effect on liquidityThink of it as tracking the cash journeyWhere it came from and where it wentLet's dive into its three components:🔹 Operating ActivitiesCash from your day-to-day; from selling goods to paying employees🔹 Investing ActivitiesCash used or received from buying/selling assets, like machinery or even entire businesses🔹 Financing ActivitiesCash interactions with stockholders and lenders, from issuing stocks to repaying debtSo, who uses the SCF? 🧐1. Investors: To gauge cash flow patterns2. Creditors: To assess liquidity3. Management: To ensure liquidityIn a world run on credit, cash remains king 👑—---------------BONUS: Analyze your cash position w/ 4 KPIs:1. Free Cash Flow:(OCF) Operating Cash Flow - Capital ExpendituresThe amount of cash a company has left from its operations after it pays for capital expenditures like buildings or equipment. It represents the cash available to all investors in the company.2. Cash Flow Margin:OCF / Net SalesThis ratio showcases the company's ability to convert sales into cash. A higher percentage indicates a more efficient operation.3. Cash Flow to Debt Ratio:OCF / Total DebtIt indicates a company’s ability to cover its total debt using cash from operations. A higher ratio means better capability to cover its debt from generated cash.4. Cash Flow Return on Assets:OCF / Average Total AssetsThis ratio provides insight into the company's efficiency in generating cash flow from its assets.—---------------👉 Want to know more?Supercharge your career with the CMA credential🌟 82,000+ accountants got my free CMA exam cheat sheet. Get yours too! (link in bio)—---------------Hi! I’m Nathan Liao, Founder & CEO of:🚀 CMA Exam Academy dot com- Pass the CMA exam on your first attempt!- 16-week Accelerator program (link in bio)- Students in 120 countries. 92% exam pass rate➕ Follow me for accounting & finance insights

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Small brief for the importance of SCF 👌🏼

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The most useful statement for company to knowing company cashflow positions, and how to manage them.

Decoding the Statement of Cash Flows (SCF)5 Limitations to be aware of 👇🏼We often tout the SCF as a mirror to liquidityWhile it's a critical piece in financial reporting It's equally important to recognize its limitationsLet’s dive in and demystify some of these:1️⃣ Historical, Not Predictive:The statement reports past cash inflows and outflows. It's a reflection, not a crystal ball.Example: Just because a company generated significant cash from operations last year doesn't mean it's guaranteed to do so next year. 2️⃣ Non-Cash Activities:Certain significant non-cash investing and financing activities might not appear. Always cross-check with the notes to the financial statements.Example: A company could issue shares to acquire a new asset. This crucial transaction won't appear in the cash flow statement.3️⃣ No Quality Indication:It tells the 'how much' but not always the 'how' or 'why'. Delve deeper. Look at other financial statements for a more comprehensive view.Example: A surge in cash flow from operations could be due to improved sales, or just extended payables.4️⃣ Cash ≠ Profit:Profitable companies can, and do, run out of cash. A company’s health is multi-dimensional; don't rely solely on cash flow to gauge it.Example: A company might show high profitability but have all its cash tied up in inventory, leading to potential liquidity issues.5️⃣ Inconsistencies and Incomparabilities:Different companies might classify certain cash flows differently. Always dig into the details when comparing companies.Example: One company might classify interest paid as an operating cash outflow, while another might see it as a financing outflow.—---------------The SCF is just one lens to view a companyIt offers insights into liquidity & efficiencyFor a fuller picture, analyze with other statementsAs always, context is king 👑👉 Want to know more?Supercharge your career with the CMA credential🌟 82,000+ accountants got my free CMA exam cheat sheet. Get yours too! (link in bio)—---------------Hi! I’m Nathan Liao, Founder & CEO of:🚀 CMA Exam Academy dot com- Pass the CMA exam on your first attempt!- 16-week Accelerator program (link in bio)- Students in 120 countries. 92% exam pass rate➕ Follow me for accounting & finance insights

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its always beneficial to know limitations of powerful statement like cashflow.

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Financial health is in a healthy Balance Sheet.

Five Income Statement LimitationsWhat you need to know 👇Let's dive into the Income Statement aka P&L It's an indispensable tool, no doubtBut like all tools, it has its nuances & limitations:1. Non-Monetary Items:Ever hear of the phrase "Not everything that counts can be counted"? There are several non-monetary aspects, like a company's reputation or employee morale, which aren't captured here but are undeniably significant.Example: A company's brand value or its relationships with key stakeholders won't reflect in its P&L, but these can majorly influence its future profitability.2. Accrual Accounting:The P&L reflects revenue and expenses which are not necessarily cash transactions and may not accurately predict future cash flows.Example: A company may report high revenues due to a massive deal but hasn't yet received the payment, potentially masking short-term liquidity challenges.3. No In-depth Breakdown:While it offers a snapshot of revenues, costs, and profits, it doesn't always delve deep. Specific business segments or products may have differing profitability, hidden by aggregated numbers.Example: A company with five product lines may find that three are highly profitable, while two are not. The aggregated P&L might not reveal these disparities.4. Subjectivity and Estimates:Certain items, like depreciation or doubtful debt provisions, involve a degree of estimation and can be subjective, affecting the comparability across firms.Example: Different companies might employ varying methods of depreciation for similar assets.5. Temporal Limitation:It provides a financial picture for a specific period, not an ongoing snapshot. Seasonal businesses, for instance, might exhibit varying profitability across different months.Example: A ski equipment retailer's Q1 results will look vastly different from its Q3, given the seasonal nature of its business.—---------------The Income Statement is an essential toolBut always look beneath the surfaceRemember that context is everything👉 Want to know more?Supercharge your career with the CMA credential🌟 82,000+ accountants got my free CMA exam cheat sheet. Get yours too! (link in bio)—---------------Hi! I’m Nathan Liao, Founder & CEO of:🚀 CMA Exam Academy dot com- Pass the CMA exam on your first attempt!- 16-week Accelerator program (link in bio)- Students in 120 countries. 92% exam pass rate➕ Follow me for accounting & finance insights

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In my journey towards becoming a CA, one paper I had to resit many times was Strategic Financial Management (SFM). My interactions with other candidates revealed that many students also have this paper as a challenge.Of course I eventually overcame. However, I would like to share two tips that contributed immensely to my success:1. Let go of the fear. As you journey through any endeavour you have to be careful who you listen to and then, how you listen too. The human mind learns beyond mere words. It receives communication beyond letters. Oftentimes what you hear all around you is how difficult it is. You need to surround your heart and head with voices (yours and others) reiterating to you that 'it is possible', 'it is easy', 'I-CAN do it'. The moment I changed my mindset towards the subject, what once looked insurmountable became one of the easiest courses to pass. My confidence was boosted and despite attempting only 3 full questions (and some change here and there) out of the 5 required (due to time constraint), I was sure I would pass and so it was. So, next time you hear 'SFM is hard', quickly rebuff it and reassure yourself that the fact that a subject is bulky doesn't mean it is difficult. It is simple and you are bigger than that course.2. Of the 31 chapters in the latest syllabus, 13 (about 42%) has nothing to do with calculation. They are simple theoretical texts. Just read and comprehend. Of the remaining 18 chapters, about 50% of the content is theory too.Without opening the text material, I had assumed (based on hearsay and the approach of some tuition houses) that SFM was all about solving and I would solve and solve till I'm bored. Then on exam day, I would be lost on the theoretical questions and also waste time solving what I did not really understand.What did I do differently this time? I focussed more than 70% of my preparation time reading the theoretical aspects of the textbook and eventually solved just one or two examples per topic. I found that having a well-rounded knowledge of the concepts and theories made the calculations easy without having to cram (memorize) too many formulas. It eased the pressure and made me love the course more. On exam day, I found that more than 60% of the exam questions do not require any mathematical calculations and I cruised past the questions easily.ICAN Exam is a professional one and must be approached as one. As a finance and accounting professional, you must first conceptualize what you want and model it in your mind before executing it. To successfully compute and calculate, you must have a mind already enriched with vast understanding of the applicable underlying concepts and principles.Here are my 2 cents for intending Chartered Accountants. Do with it as you would ✌️.Wishing you success in your next exams🙏ÌWÉ

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