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Very early on, someone experienced told me they always start with the Cash Flow statement. Of the statements, that's the least-bullshit one of the three. Look a
by 6cxs2hd6 14y ago
Very early on, someone experienced told me they always start with the Cash Flow statement. Of the statements, that's the least-bullshit one of the three. Look at Cash Flow, and look at the "Current" subtotals of the Balance Sheet. Look at these longer and more carefully than the P&L.
Technically you should understand how all three fit together; each alone could be misleading in its own way. But for many businesses the cash perspective is the closest to reality. If you only have time to understand one, deeply, that's the one.
I suspect most people look mostly at the P&L a.k.a. Income Statement. But that uses a lot of constructs (like "accruing" things over time) in a well-intentioned effort to tell a more-accurate story about the business. The problem is if you treat it as "hard numbers". Actually it's just one story about the business, a useful fiction with some truthiness value.
- hga 14y agoBingo. Whether you're alive next week, or perhaps asking your employees to work for free while you close the next round of investment, depends entirely on cash flow. Cash flow tells the real story of what's happening and whether its a viable (well, at the time) business. Other measurements are important, but as you note can be fudged. Even fudged in good will. Think about the AOL example; from memory, the cost of customer acquisition was defensibly amortized over the expected subscription period (how long they stayed a customer). If that period is overestimated....
- ghaff 14y agoSmall businesses are (almost) all about cash flow. As a company grows, the income statement and balance sheet becomes more important--especially if one or more aspects of the business model cause a big difference between when money comes in or out and when it is recognized under GAAP.