What's In Your Company's Wallet?

In my insights column this week, I write about how the economic crisis has brought laser-like attention to the issue of cash flow from executives and managers. These are the folks who usually spend their time discussing “growth strategies.” Have you noticed that the bigwigs at your firm have taken a break from quoting Sun Tzu’s The Art of War in favor of Benjamin Franklin’s penny-pinching bromides? What this means to you is that you should take the time learn about your company’s cash position. Remember, over the long-term, positive cash flow is the key to staying in business.
If you know how to spend less than you get, you have the philosopher's stone.

-Ben Franklin

Let’s look more closely at our example company, Albemarle, to learn where cash flow comes from. Just like consumers who worry their income may decline in the future, companies in the chemical industry are looking to increase the money they have in the bank. In its fourth quarter earnings statement, Albemarle reported that it has $253.3 million in cash and cash-like equivalents. This figure is $46.1 million more than it had on September 30 (the end of the third quarter). The only way to really look deeper into cash figures is to review what is called the Consolidated Statements of Cash Flow. (There is an abbreviated version in Albemarle’s fourth quarter report). The full statement can be found in quarterly (10-Q) corporate financial filings and in annual reports. The most recent statement from Albemarle is its third quarter 2008 10-Q filing. You can search these filings on the SEC website through its EDGAR system. There is usually also a link from any corporation’s investor relations webpage. It’s important to understand that net income does not mean “cash in hand.” That is why the consolidated statement of cash flows only starts with net income from the period (in this case, the first three quarters of 2008). To figure out how much cold, hard cash the company has, it adds back all expenses that did not require cash, and subtracts all non-operating expenses that were paid out in cash. It also adds in money the company receives as loans. For example, Albemarle’s operating activities provided $149.6 million in cash, but the firm also received $285.3 million from borrowings. In other examples, Albemarle contributed $9 million of cash out of its net income into its pension fund, and it gained over $6 million in cash when it received payment for land that was sold. The statement tallies up all these happenings, and shows that Albemarle increased its cash holdings, thanks to its positive cash flow, by $76.7 million. Companies often use positive cash flow to repurchase stock. You can see that Albemarle did this in 2008, to the tune of more than $163 million. If you work for a publicly traded company, I encourage you to examine your firm’s numbers. Does your employer have the philosopher’s stone? How about your company’s competitors? Its Customers? Suppliers? I know that this isn’t really fun, but I encourage you to do it anyway. These are scary times. A good look at your company’s financial statements can go a long way to either reassure you that your company will weather this storm, or perhaps signal that it’s time to increase your own cash reserves. As our newest best friend Ben would say:
An investment in knowledge always pays the best interest.

Author: Melody Bomgardner

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  1. This is quite helpful, but I suspect that those who work for extremely large companies will have more difficult time doing these calculations.

  2. It’s true that some companies have more complicated cash flows than others, thought that’s not necessarily due just to size. The statement of cash flows, luckily, does the calculations for you, and will show whether a company has increased or decreased it’s cash in a given time period. What can be the most difficult is to try to relate what you see on the income statement and cash flow statement to what you see around you at the lab or office. It’s not always possible, I suspect, but hey, what can it hurt to take a look?