POST #7: Cash is King - ASC 230
I've developed a unique appreciation for reviewing, building, and forecasting cash flow. Accurate cash forecasting requires focus, constant revisions, and a deep understanding of cash collections and AR activities. The ultimate goal is to generate Free Cash Flow (FCF) to sustain operations and maintain capital assets.
In M&A, we closely examine FCF when evaluating acquisition targets, as it provides valuable insights alongside the Balance Sheet and Income Statement. A small miscalculation in the Cash Flow Statement can have serious consequences, highlighting the critical role of accurate data.
The Cash Flow Statement, detailing cash inflows and outflows, can be built using either the direct or indirect method, with the latter being more commonly used. Most of Envol Capital’s forecasts utilize the indirect method under US GAAP.
For illustration, I’ve created financial statements for a fictional company, color-coded to show how different financial statements connect and flow into the Cash Flow Statement using the indirect method.
