The amount of money you receive and send out is one of the most important aspects of running a business. As a rule, more should flow in than out, but it doesn’t always happen that way. You may have to pay your staff and suppliers until you receive your cash. Whatever your situation, understanding the cash flow statement will help you figure out where you are at any given time. A cash flow statement shows you how money flows into and out of business, so you can spot patterns and manage them.
Keep reading to learn what a cash flow statement is and why it is important for your business.
What Is a Cash Flow Statement?
Cash flow statements provide a snapshot of a company’s cash flow over a period of time.
A cash flow statement explains how a business’s cash balance changes over time (e.g., cash and cash equivalents).
Thus, this statement measures the company’s ability to finance operations and pay its debt obligations and how well its cash position is managed. As well as showing how much cash the company produced (called free cash flow (FCF)), the cash flow statement also indicates how much cash the company generated for the owners.
A business receives money when cash flows into it.
For example, when investors purchase stock shares on an exchange, their capital is considered an inflow. The opposite of cash flow is cash flow out of a company.
For example, a company pays its suppliers for materials or inventory, covers an outstanding tax bill, or meets its weekly or monthly payroll obligations – is cash flow out.
In accounting, the cash flow statement is also called the “statement of cash flows” or the “funds flow statement.” Alternatively, it might be called a consolidated statement of cash flows in the official financial statements of the company.
SEC-registered companies are required to file cash flow statements regularly. Quarterly and annual earnings reports are submitted with these statements. You can find a company’s most recent 10-K annual report on SEC.gov under the “Financial Statements and Supplementary Data” section.
There are usually three sections in a cash flow statement:
- Operating activities.
- Investing activities.
- Financing activities.
These three variables will determine the overall cash and cash equivalents changes during a particular period.
What Does a Cash Flow Statement Tell You?
Cash flow statements reveal a company’s liquidity position. This way, you can determine if the company can fund its operations without outside funds. As a result, you are more likely to survive challenging periods or economic downturns if you prepare for them and have this in place. Additionally, it can help to determine a company’s short-term viability.
The cash flow statement also indicates how a company is faring in its life cycle. How is a company doing? Is it maturing, declining, or growing?
In a growing company, operating and investing activities may generate negative cash flow, while financing activities generate positive cash flow.
And as a firm matures, its operating cash flow will probably be positive, and its investing cash flow may be negative. While cash flow may be positive during a declining company’s operating and investing activities, cash flow from financing may be negative as the company pays back investors.
A cash flow statement can be prepared monthly, quarterly, yearly, or for any other period you deem most useful. Maintaining a monthly record is beneficial to most businesses.
Positive cash flow indicates that money flows into the business more than leaves it over a particular period. Companies can use excess cash to pay down debt, invest in growth opportunities, and return dividends to shareholders (through dividends and share buybacks). In addition, a company’s positive cash flow does not necessarily mean it is profitable. It is also possible for a business to be profitable without having positive cash flow.
In a negative cash flow situation, more money flows out of a company than into it over a specific period of time. To better understand a company’s financial performance, examining cash flow changes over multiple periods is important. Negative cash flow may result from income and expenditure mismatches, but this doesn’t always imply negative profit.
How Do I Read a Cash Flow Statement?
The nature of your business may dictate how complex or simple your cash flow statement is. An operating cash flow statement is normally broken down into three sections: investing, financing, and operating activities.
(1) Operating Activities
Essentially, operating activities are what a business does to maintain its existence or function. A restaurant, for instance, serves food as its primary operating activity, while a tech company sells IT services or software.
An operating cash flow statement shows all positive cash flows produced by everyday operations and includes revenue and expenses associated with delivered goods and services.
When it comes to incoming cash flow, operating activities include interest payments, dividend payments, and payments from sales. COGS, employee and supplier payments, and taxes are all included in incoming operating activities.
Your business’ operating cash flow is perhaps the essential piece of the puzzle, as it shows whether it’s bringing in more money than it’s spending. Your operating cash flow may be unsustainable if it doesn’t steadily improve over time.
It is essential to understand your operating cash flow so you can improve internal processes, pricing, and many other aspects of your business. It will lead to higher cash flow – and less money spent in the process.
(2) Investing Activities
As part of a cash flow statement, this section would detail any cash flows in or out of business related to investing. As an example, an investment in new equipment would be made from the profits of the sale of equipment already owned by the company.
In addition to the sale of income-producing assets, investing activities can also involve purchasing or renting them. An example would be if a company purchased another company or franchise that generated cash flow.
Investing cash flow includes payments from loans, cash from asset sales, and funds from maturing market securities. A few examples of outgoing Investing cashflow are payments made on purchasing property, equipment, and other items for the business.
A negative CFI is common for small, growing businesses. To make money, you need to spend money – and your investments may not pay off right away. It should become easier for businesses to maintain a positive CFI once they achieve profitability while increasing growth expenditures at the same time.
(3) Financing Activities
An organization’s financing activities describe the cash flows that occur between its creditors and its debtors. Finance can be either debt- or equity-based. Whenever a company has outstanding business loans, this section holds payments due. If the company pays dividends to shareholders, they would also go here.
By breaking down the cash flow statement this way, it is easier to distinguish which activities generate the most positive cash flow and which produce negative cash flow. If a company generates more cash flow from its operating income than from its net income, it would be in an ideal world.
A CFF provides insight into the business’s stability and growth by assessing the financial strength and structure of the company. To understand cash flow from financing activities, it is necessary to understand the context.
What Is an Example of a Cash Flow Statement?
|Cash Flow Statment of Company BitnopZ
FY Ended 31Dec, 2021
|Additions to Cash|
Decrease in Accounts Receivable
Increase in Accounts Payable
Increase in Taxes Payable
|Subtraction From Cash|
|Increase in Inventory||(20,000)|
|Net Cash From Operations||1,123,000|
|Cash Flow From Fiscal Year Ended 31 Dec 2021||5,208,000|
This cash flow statement shows that the net cash flow for the 2021 fiscal year was $5,208,000. Cash earnings from operations contribute most to the positive cash flow, a good sign for investors. The company has generated revenue from its core operations and can purchase additional inventory.
The purchase of new equipment illustrates the company’s capability to invest in itself. Lastly, investors should have some peace of mind concerning the notes payable, as the company can cover those future loan expenses with cash on hand.
Why Is My Cash Flow Statement Important for my Business?
Cashflow statements serve several purposes. You are essentially always at risk if you don’t have a complete picture of your cash flow situation. Cashflow management, on the other hand, has a number of benefits for your business.
- Liquidity assessment: Firstly, a cash flow statement provides an overview of your liquid assets at any time. You must keep track of your cash to maintain operations and run your business effectively. The likelihood of running out of cash will always be high if you do not understand how much money you have in your bank account.
- Identify your assets, liabilities, and equity: A cash flow statement can be used along with a balance sheet to determine the overall equity position of a company. In the long run, your cash flow statements and other financial records will show the changes in your assets, liabilities, and equity. By doing this, you can better understand your business’ performance during that period – and when things don’t seem to be going as well.
- Cashflow prediction: Understanding where your cash comes from and goes will help you predict how it will turn out in the future. As a result, it is so important to assess cash flow in context. You’ll understand how changes in one area will affect changes in others by examining how the variables relate to each other. That will allow you to make more informed and strategic financial decisions as you strive to grow your business.
When Should I Hire Someone to Create My Cash Flow Statement Each Month?
It’s not hard to forecast cash flow, but it does take a little time and effort. So, you may need professional guidance if you don’t have time and are unsure about how to predict your cash flow. EcomBalance is here to help you with all of your cash flow forecasting needs! In addition to on-the-go documentation, we provide automated reporting so you can stay on top of your cash flow.
Cash flow statements show how much revenue (or costs) different activities generate for a specific company and how much profit its owners generate.
When combined with the income and balance sheet, the cash flow statement will give you a complete picture of the company’s financial health.
Tracking your business’ progress and adjusting your spending is helpful if you regularly run a cash flow statement. Investors can use cash flow statements for guidance when choosing companies to invest in.
EcomBalance is a monthly bookkeeping service for eCommerce companies. EcomBalance handles your bookkeeping and sends you a Profit and Loss Statement, Balance Sheet, and Cash Flow Statement by the 15th of each month. EcomBalance also has a sister company, AccountsBalance, that caters to agencies, software companies, coaches, and other online companies.