So aside from the cash payments and bill payments, the spending section of the cash flow table has a list of some other ways that companies spend their money — ways that aren’t on the income statement, which is why they have to get into the cash flow and affect the balance sheet.
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The list is similar to the list we have of non-income-statement money received. Just as you can receive money from other income like interest or such, you can also pay money that way. Then there are taxes, like sales taxes, which have to be paid to the government. You collected them from customers, but you have to pay them as well.
Debt repayment can be important because it’s easy to forget. The interest portion of your payments belongs in the income statement because interest reduces taxable income. It’s deductible. Principal repayment, however, doesn’t show up on the income statement and isn’t deductible. But it does reduce your cash, so you have to plan for it. Also, it reduces the debt balance, so this calculation affects your balance sheet.
In the third row from the bottom, you record the purchase of new other current assets. You’ll have to know how much you purchase in new assets in order to estimate your balance sheet. While in real life these might also be recorded as accounts payable and paid a few weeks later, we make them explicit here as if they were paid immediately in cash. That makes for better cash planning.
Logically, this next row is one for purchases of new long-term assets. These also reduce cash.
The last row in spending tracks dividends. Dividends are the distribution of profits to owners and investors. They reduce cash but don’t appear anywhere else.
Tim Berry is the founder and chairman of Palo Alto Software and Bplans.com. Follow him on Twitter @Timberry.
