What I’m showing here in the illustration might look like it’s a self-contained table, but it’s really just the bottom half. This is where the money goes (or technically, where you plan to send it). The top half, on the previous pages, was where the money was coming from.
It starts with money you spend on operations. That’s what you spend in cash, and what you spend to pay bills. These, between them, are the universe of things that happened on the income statement. The split between cash and payment of bills can be confusing, but we have to keep track of that to do a real cash flow.
And, just to make that even more fun, bill payment has to include payment for inventory, which is particularly tricky because inventory isn’t directly on the cash flow. As we discussed in cash traps, inventory is money spent on assets first, and those assets become cost of goods sold when they are in fact sold. We’ll look at that in a few pages, so bear with me.
Much like with the money received and accounts receivable, the first two rows of this table show money spent in cash and bill payments. Money spent in cash is frequently payroll, for example, for which you pay people directly, not after a few weeks. Sometimes there are other cash payments, such as petty cash.
The second obvious use of cash is bill payment. This accounts payable balance is money you owe. Every month, you pay off most of this, depending on how quickly you pay. As with receivables, there are some calculations in the background, like those shown in the illustration below:
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In the example here, the calculations start with the ending balance of accounts payable from the previous month, then add new obligations, then subtract obligations paid directly in cash, as well as this month’s bill payments, to calculate this month’s ending balance. This month’s bill payments depend on the assumption of waiting 30 days, on average, before paying bills.
Tim Berry is the founder and chairman of Palo Alto Software and Bplans.com. Follow him on Twitter @Timberry.
