What is a Cash Flow Statement?

Previously published June 14, 2021

Cash is king. And so is your cash flow statement.

Your cash flow statement tells you how much cash flows in and out of your business for a specified time period. It’s natural for your business’s cash flow position to ebb and flow, and that’s why it’s essential to track your cash consistently.

Your company may appear profitable based on your incoming revenue; however, being able to dish out cash is what will keep your business afloat. If you can’t pay your vendors, employees, or your taxes – it’s game over.

Along with your balance sheet and profit and loss statement, your cash flow statement is one of your business’s three most important financial statements. You should evaluate your cash flow position before making any significant decisions. So, you’ll want to make sure you not only have a cash flow statement but know how to read it as well.

What’s Included in a Cash Flow Statement?

Your cash flow statement reflects cash on hand and how well you manage your business’s cash position. The cash flow statement is made up of three components. These three components can be further narrowed down as inflow (receiving) and outflow (paying) activities:

Cash from Operating Activities

The cash from your operating activities includes any sources of cash made or paid from your business. Operating activities can be tracked using either a direct or indirect method. This would consist of all cash received for your business’s services and products sold and, more specifically, would include:

• Receipts from the sale of goods or services

• Income or business taxes

• Receipts for payments made to suppliers and vendors

• Employee wages/salary

• Overhead costs (rent, utilities, etc.)

  
  

Cash from Investing Activities

The cash resulting from investing activities wouldn’t include income generated by the ordinary course of business. This would include things such as:

• Purchasing new equipment

• Investing in other companies

• Selling business assets

• Loan payment (a loan your business provided)

Cash from Financing Activities

The cash from financing activities includes cash earned or spent through the financing of your business. This would include:

• Dividend payments

• Loan payments

• Stock repurchases

How to Prepare a Cash Flow Statement

You can prepare a cash flow statement easily if you’ve been tracking your income and expenses regularly. Better yet, if you’ve tracked it all using software, you can quickly generate a cash flow statement.

If you're not using software and haven’t been tracking them manually, what are you waiting for? Get to it! At the very least, you’ll want to keep track on a spreadsheet or template and review your cash flow activities in the three above areas for a specified period.

The cash flow statement pulls from the data included in your profit and loss statement and balance sheet. Your profit and loss statement shows flowing in and out of your business. The balance sheet shows how the transactions affect specific accounts (accounts payable, receivable, inventory, etc.).

Here are four rules to keep in mind. When you have transactions that show the former, it will equal the latter:

1. An increase in assets = decrease in cash flow

2. A decrease in assets = increase in cash flow

3. An increase in liabilities = increase in cash flow

4. A decrease in liabilities = decrease in cash flow

   
   

Your cash flow statement information is deducted from the earnings found on your profit and loss statement.

More simply put, the cash flow statement formula is as follows:

PROFIT AND LOSS STATEMENT + BALANCE SHEET = CASH FLOW

Cash Flow Analysis

Your cash on the cash flow statement should match the amount for the increase or decrease of cash between the balance sheets that apply to the cash flow statement period.

Negative cash flow isn’t always negative. For example, you may be in the negative because you bought something that’ll make you money later.

Similarly, a positive cash flow is not always positive. For example, it might mean that you have cash on hand now, but that could be because of a loan you took out.

Cash Flow is King

When it comes down to it, a cash flow statement is a good forecasting tool for your business, and it’s, therefore, a must. Your cash flow statement will measure your business’s profitability and long-term probability of success.

It will help you identify any significant issues and which category they are part of. This will allow you to make changes before they become detrimental to the success and growth of your business. Your cash is the bloodline of your business, so handle it carefully.

It’s important to keep in mind that your cash flow statement will only be as accurate as your bookkeeping. So, how accurate are your books?

If you’re looking for help with your cash flow statement or need to get your books tidied up, contact us today to schedule an initial consultation.