Q2: What does the Statement of Cash Flows tell us?
The Statement of Cash Flows tells us what happens to cash during the year between the opening and closing cash balances. It sheds light on the question: how did our firm’s cash balance change or move from its opening balance to its closing balance? And it also provides insights into the implications this might have for our firm’s future cash position.
This is the case with Ryman Healthcare.
On 31 March 2017, Ryman Healthcare had precisely no cash; that is right, exactly none: zip, zero, zilch. What? No cash? No cash? How does that work? If I go to the ATM and find I have no cash (or if I ‘tap’ my debit card to buy a coffee and it is rejected) then I am in trouble. No cash, and people who I may not particularly know that well, will not do things for me. But if I have cash in my pocket (or sitting in my debit card bank account) then I can give the cash to people and they will do things for me (service) and give me products (goods).
How does it work with Ryman Healthcare, with no cash balance at balance date? Does ‘no cash’ mean ‘no cash’? Well, not exactly. If we look at the Statement of cash flows of Ryman Healthcare (see Figure 7-1 in Section 7.3 below) we see that in 2017 it had net operating cash flows of over $300 million; and it also had net financing cash flows of over $200 million. So there is plenty of cash flowing into, out of and within Ryman Healthcare; over half a billion dollars to be precise. So Ryman Healthcare has plenty of cash in its business. All that happened is that on balance date as at 31 March 2017, on that particular day, it had no cash. And on the previous balance date, 31 March 2016, it also had no cash and had a bank overdraft of about $1 million. So, during 2017, cash went from negative $1 million (bank overdraft) to zero. But for Ryman Healthcare there was a lot happening with cash in between those two balance dates. A lot. So how do we find this out? How do we find what happens to cash during the year between the opening and closing cash balances? The answer to this is: take a look at the Statement of cash flows. And as we will see, a lot can happen to cash between the snap shots on a day between two balance sheets.
Also, see Martin’s videos: What a Statement of Cash Flows Tells Us.