Cash Flow = (Current Assets – Current Liabilities). Negative cash flow means we are decreasing our available resources. From the balance sheet we reviewed over the last few weeks we can construct cash flows for both the years 2007 and 2008 as well as the net change in capital over these two years. In 2007 we see we had a net increase in capital of $11 million but a decrease of $100,000 in 2008. The net change over these two years is $11.1 million.
Lets look at where these changes occurred by looking at all the individual changes in the current assets and liabilities.
There was no change in the cash on hand which was $1 million at the end of each year.
The Accounts Receivable has decreased $1.5 million. This is understandable as a direct result of the decrease in sales volume. The allowance for uncollectible debt has decreased $50,000, which is to the positive side of cash flow.
Accounts payable, a liability, has increased $1.65 million. We are falling behind in paying our suppliers in this recession and are using them as a bank for interest-free money. That will not likely continue before we begin to have delivery problems.
Our inventory decrease was $1.65 million, which is indicative of the fact that we have that much less goods available for sale.
In purchasing that new equipment, we took out a short-term note of $7 million which now shows up as an additional liability. We have paid interest in 2008 on that note but have yet to pay on the principal.
Accrued expenses have decreased $777,000 mostly due to reduced taxes. The net shows the total decrease in cash flow of the $11.1 million.
Obviously, this sort of change in available cash cannot be sustained another year since, if you will recall from our Balance Sheet, we have now only $1.9 million in retained earnings. Management has done a good job in containing the downturn through 2008, but must continue to show profits through the recession as it continues into 2009 and possibly 2010.