PREPARING "USER FRIENDLY " CASH FLOW STATEMENTS AND PROJECTIONS FOR SMALL BUSINESS

Evidence in the literature repeatedly points towards failure to understand cash flow shortages as a major problem of small business operators. Theoretically, they should be able to use financial statements prepared by their accountants as planning and control tools. However, because of accountants ' use of the accrual system, rather than cash, and the meticulous detail that tends to make statements too complicated for the untrained user, many operators simply do not attempt to use these statements. The purpose of this paper is to show how a non-accountant manager can take the income statement, statement of retained earnings, and comparative balance sheets and convert them into cash flow tools he or she can understand and use. Step one consists of conversion of income data to a cash basis to explain discrepancies between income and cash flow. Step two is the preparation of a cash flow statement focusing on issues of most concern to the small business owner like "working capital changes". Analysis of the statement provides insight into cash flow problems and reveals options available to reduce outflows in the future. Step three is a planning procedure illustrating a technique fo