Understanding the Cash Flow Statement

Staying on top of your cash flow is a crucial part of running a successful business, and there are several different important financial reports that can help you out. Chief among those are balance sheets, profit and loss analysis, budgets and cash flow statements.

It’s this last report — the cash flow statement — that we’re going to dive into here. We’ll explore what it is, what it does, why it matters and how to prepare one. Used properly, the cash flow statement can give you insight into your business’s financial performance. It provides the information and reassurance that financial institutions, suppliers, investors, employees and others need that your business is healthy and has the money on hand to meets its commitments.

What Is a Cash Flow Statement?

A cash flow statement shows how the money coming in (revenue) and going out (expenses) of your business affects your cash on hand, assets and operating budget. It typically breaks down into three main areas: operating activities, investing activities and financial activities. It will often be part of your formalized business accounts, and it’s a very useful piece of information to provide parties that have a financial stake or other interest in your business.

Why Is a Cash Flow Statement Important?

A cash flow statement is a way to understand how financially secure and viable your business is, especially in its ability to manage short-term debt, pay employees and pay bills. In particular:

  • You and your accountant can use it to understand whether you can meet short-term liabilities, payments and bills due.
  • Lenders can use it to understand your ability to repay loans and decide whether to let you borrow money.
  • Investors can understand how financially sound your business is as part of due diligence.
  • Employees and suppliers can understand how likely you are to pay salaries and bills.

How Is a Cash Flow Statement Constructed?

Cash flow statements break down into several predefined areas. Your accountant can help you decide on the level of detail you need to include in your cash flow statement, and the sections below are shown as examples only. The level of detail that each business needs in its cash flow statement can vary.

Cash Flow Statement Heading

The heading of the cash flow statement normally includes your company name and the period that the cash flow statement covers.

Blue Widget Co.
Cash Flow Statement
Year Ended December 31, 2017

Cash Flow Statement Operations Section

The first section is operations, which typically shows your revenue collected and expenses incurred in the day-to-day running of your business. It shows your current assets and liabilities, and will declare revenue collected from customers and money paid out in various categories.

Cash received from customers: $485,000
Cash paid for expenses: ($125,000)
Cash paid to suppliers: ($215,000)
$145,000

Cash received from customers typically includes: 

  • Revenue collected from sales 
  • Invoices paid 
  • Interest received 
  • Payments collected from business creditors 
  • Cash paid out can include: 
  • Salaries to staff 
  • Operational costs 
  • Purchases from suppliers
  • Raw material and equipment expenses 
  • Depreciation 
  • Accounts payable 
  • Bills
Cash Flow Statement Investments Section

The next section shows investments that you and others have made in relation to your business. It can include the purchase or sale of assets and loans.

Purchase of office space: ($20,000)
Sale of equipment: $5,000
($15,000)

Cash Flow Statement Finances Section

Financing activity shows the income and expenses of the business from external financing like investment, dividends and loans.

Bank loan: $100,000

Bank loan repayments: ($25,000)
Money repaid to investors: ($35,000)
$40,000

Cash Flow Statement Final Section

The final section will show the totals and changes in cash flow. It will also account for cash balances from previous statements to give an up-to-date snapshot of the current cash in the business.

Net increase (decrease) in cash: $170,000
Add cash from January 1, 2017: $85,000
Current cash on hand, December 31, 2017: $255,000

Cash Flow Statement Additional Information

It is possible that your business will need to show cash flow that isn’t clearly covered in the sections above. In these cases, this should be indicated in the cash flow statement itself or as a footnote. Examples of additional areas could include: 

  • Leasing to purchase an asset 
  • Converting debt to equity 
  • Exchanging non-cash assets or liabilities for other non-cash assets or liabilities 
  • Issuing shares 
  • Payment of dividend taxes in exchange for assets

If you’re not sure where something should be shown, speak to your accountant.

Complete Cash Flow Statement

Blue Widget Co.
Cash Flow Statement Year Ended December 31, 2017
Cash flow from operations activities
Cash received from customers: $485,000
Cash paid for expenses: ($125,000)
Cash paid to suppliers: ($215,000)
$145,000
Cash flow from investment activities
Purchase of office space: ($20,000)
Sale of equipment: $5,000
($15,000)
Cash flow from finance activities
Bank loan: $100,000
Bank loan repayments: ($25,000)
Money repaid to investors: ($35,000)
$40,000
Totals

Net increase (decrease) in cash: $170,000
Add cash from January 1, 2017: $85,000
Current cash on hand, December 31, 2017: $255,000

How a Cash Flow Statement
Shows a Healthy Business

It’s easy to see how positive cash flows can show the state of financial health of your business. Having plenty of income coming in combined with a healthy cash balance and spending on business growth are all positive signs.

Together, these should result in plenty of “free cash flow,” or money coming into a business that is not immediately earmarked for spending. Free cash flow shows that a business is earning enough to invest in future growth — and that’s something suppliers, lenders, employees, investors (and you!) really want to see.

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