Business readiness

Net Income to Cash Reconciliation

What is Net Income to Cash Reconciliation?

A report that lists all of the adjustments that need to be made to the Net Income figure over a given period to obtain the Change in Cash figure over that same period.

Most businesses report their profit on an accrual basis rather than a cash basis. They recognize revenue when it is earned and costs when they are incurred rather than when cash flows in or out of the business.

For these businesses, a net income to cash flow reconciliation report explains why the reported profit figure is not necessarily reflected in the change to the cash balance by outlining each adjustment that needs to be made to net income in order to arrive at the net cash flow position.

 

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Why is Net Income to Cash Reconciliation important for business today?

Reconciling your net income to the change in your cash position is an important exercise because:

  • Net income may represent a fairer indication of the performance of the business but it will always be important to understand how cash is moving into and out of the business given the need to ensure any shortfalls in future cash flow can be financed
  • Being able to reconcile these two metrics provides confidence in the internal accounting systems and procedures
  • Understanding how cash inflows compare to accounting profit provides a starting point for determining whether there are any issues with the ability of the business to convert profits into cash
  • Allows you to identify the key areas of cash flow drain from the business and develop more accurate forecasts for your future cash needs
  • Allows you to calculate certain cash flow ratios and compared the performance of your business against industry benchmarks

Why is Net Income to Cash Reconciliation important for an event tomorrow?

The cash flow reconciliation report is very important for potential investors in any deal:

  • All transactions, whether they involve debt or equity, are primarily concerned with the quantity and timing of cash flow from the business
  • Understanding how cash has moved into and out of the business in the past in order to developed more accurate predictions of future movements is critical
  • Provides an insight into how effectively management have been able to manage cash needs of the business in the past

Pros of addressing Net Income to Cash Reconciliation

  • Ensures cash flow financing needs are met
  • Ensures accounting metrics are robust
  • Helps identify cash flow timing issues
  • Allows comparisons of cash flow metrics against industry benchmarks

Cons of not addressing this topic

  • Greater potential for inaccurate accounting figures
  • May not identify upcoming cash flow shortfalls
  • Unable to assess the business against industry benchmarks
  • Unable to identify key drains on business cash flow

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