Cash Flow Statements 101

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Running a business means doing all the fun stuff that makes up your business, but it also means crunching numbers and doing paperwork behind the scenes. Cash flow is the key to running a successful business, and understanding cash flow statements and how they work is essential.

Understanding Cash Flow

Cash flow is the money that comes in and goes out of your business. It comes in when you earn it (make a sale) and leaves when you pay an expense. A company can’t survive without a positive cash flow; the higher the cash flow you can create, the more successful your business might be.

Understanding the Cash Flow Statement

A cash flow statement summarizes the funds coming in and out of your business. It reports your cash flow based on a specific period, such as a month or quarter. You should be able to look at your cash flow statement and tell where your money came from and where it went.

Your cash flow statements will also show where you earn money, such as interest or dividend income, and the net cash flow shows how your business is doing – whether it’s profitable or has a loss.

How to Use Cash Flow Statements

You can use cash flow statements to make almost any business decision. For example, cash flow statements can help with the following:

● Which decisions you made were worth it, and which decisions should be rethought
● Tell shareholders if an investment is worth it
● Help you determine if your debt load is manageable

Reading a Cash Flow Statement

Cash flow statements have three main categories – operating, investing, and financing activities.

Operating Activities
Your operating activities are your net income. You’ll get this number for your income statement, but you may have some funds that need to be deducted, including:

● Upcoming payroll
● Debts owed soon
● Other business expenses

After considering these expenses, your net cash flow will be based on operating activities.

Investing Activities

Any cash flow earned from investing is reported here. This isn’t money you invested in your business but the money you invested elsewhere, including:

● Selling physical assets
● Buying other companies
● Buying or selling investments

Financing Activities

This is the section where you record any money spent to cover your debts or raise new capital. This may include making interest payments, paying dividends, or handling company equity (buying or selling it).

If this number is positive, it becomes a part of your cash flow.

If you’re thinking a cash flow statement sounds confusing, or you don’t know where to start, contact me. Together we can create your company’s financial statements to ensure you’re on the right track and that filing your tax returns is much easier.