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Chapter 6. Cash > Create Your Own Value Chain

Create Your Own Value Chain

Now that you have had a brief introduction to cash flow statements, this is a good time to document the cash flow measures that are most important in your organization and to create a cash flow value chain for your target organization. In exercise 6-1, fill in what you can and make notes of what you need to learn about your organization or your target organization.

Let’s Review

  • This chapter provides details for the cash component of step 3 of the financial value process: identify financial imperatives.

  • Cash is different from profit because profit can be tied up in non-cash items such as inventory or AR. An organization might be making a great profit, but if all the profit is in non-cash assets, then the organization will stop running. Senior executives must always be looking forward to ensure that there will be enough cash on hand to pay employees and creditors and to keep the organization in operation.

  • A cash flow statement is where the organization tracks its increases and decreases in cash over a specified period. Cash flow statements have three sections. The first shows changes in cash from normal operating activities. The second shows changes in cash from investing activities, and the third shows changes from financing activities.

  • All items on the cash flow statement are linked to items on the income statement and the balance sheet. The net profit (or loss) on the income statement becomes the first line of the cash flow statement. The changes from last period to this period for the assets, liabilities, and owner’s equity of a balance sheet are transferred to the cash flow statement as changes in operating activities, investing activities, or financing activities.

  • Changes in assets move in the opposite direction as cash. If the asset increases, cash decreases.

  • Changes in liabilities or owner’s equity move in the same direction as cash. If a liability or owner’s equity increases, cash increases.

  • Too much cash on hand can be as much of a problem as too little. Senior management must make sure there is a wise use of cash at all times.

  • You may already have connected the value of your solutions to the income statement or the balance sheet. Knowledge of your impact on cash gives you even more variety and opportunity to point out the value of those same solutions to your organization.



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