Why Product Managers Should Care About Cash Flow Statements
They cut through the complex nature of accrual accounting
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Cash Flow Statements are probably the hardest type of financial statement for product managers. You should understand Income Statements and Balance Sheets before you try to understand a Cash Flow Statement. Cash Flow Statements can be the most useful financial statement for a product manager. They strip away the complexity of accrual-based accounting. They show how cash moves into and out of a business. Product Managers Should Care About Cash Flow Statements.
What Are The Components of a Cash Flow Statement?
A Cash Flow Statement summarizes the amount of cash and cash equivalents entering and leaving a business. It has three major components:
- Cash from operating activities
- Cash from investing activities
- Cash from financing activities
From a product manager’s perspective, the cash from operating activities section is the most valuable. The other sections are interesting, but not as relevant.
Cash From Operating Activities
This section of a Cash Flow Statement is the most informative for product managers. What it does is strips out all of the non-cash items that were included in the Income Statement (aka P&L) Take a look at Oracle’s Cash Flow Statement:
The Net Income line comes from Oracle’s Income Statement. Net Income contains both cash and non-cash items. The non-cash items are a byproduct of accrual accounting. They mask how much cash the operations of the company generate. The two parts of this section. The first is ‘Adjustments to reconcile net income to net cash provided by operating activities’ The items like depreciation, amortization, and stock-based compensation are all non-cash items. The second part involves changes in ‘operating assets and liabilities, net of acquisitions.’ The decrease in accounts payable and other liabilities in an increase in cash flow. Operating…
