The Cash Flow Statement Primer

Every business owner is aware of the concept of cash flow. It is, afterall, the ultimate measure of how a business is doing. The ways that your small business spends and makes money are probably always on your mind. Accounting for cash flow is one way you ensure your business is successful. I believe the cash flow statement is the most valuable of the financial reports. This primer will walk you through the report.

You may, however, be less familiar with a cash flow statement. After all, it is often confusing and skipped over by even your accountant in most cases. However, in our opinion, it is the most important and telling statement for business owners. Want to find out more? Below is a brief description, followed by a quick guide on why reviewing cash flow statements is important for your business.

What is a cash flow statement?

A cash flow statement is a summary of the money you are earning and spending. In other words, it tells you whether your business is making or losing money.

This report differs from other kinds of financial statements, like balance sheet or income statement, in that they aren’t concerned with theoretical or “non-cash” items. An income statement records expected income or the value of payments that haven’t yet been received. The income statement doesn’t necessarily reflect the cash that a business has accessible at a given time. Cash flow statements don’t report the devaluation of assets, or any projected expenses or gains. They are a ledger of the actual cash amounts that have entered or been spent over a given period.

Often when reviewing financial statements, owners will question why the change in their bank account doesn’t equal the income statement. This is a common frustration and rightfully so. The cash flow statement however shows the impact of the company’s operations on their cash balance.

Interpreting a cash flow statement

Cash flow statements can be confusing, especially if you don’t know how to interpret the data they present. The typical cash flow statement consists of 3 sections, described and explained below.

Cash flow from operating activities

This section of the report is the most relevant to small businesses. It records the transitions making up day-to-day business activities. A small business commonly accounts for most of its cash flow by selling products, paying workers, and buying supplies.

The operating section calculates the difference between how much money you have made from selling products and how much spent on operating costs. It can be different for each business. However, it will probably include values like how much cash was collected from sales or how much money was spent on payroll or inventory.

A good example of the difference between revenue on the income statement and positive cash flow is accounts receivable. While a business might record revenue on a sale that they haven’t received cash for (aka accounts receivable), this doesn’t represent an increase in cash. This would be reflected on the cash flow statement so you can see the true cash collections from customers.

Cash flow from investing activities

Here, investments mean things that will affect your business in the long term. A few examples are purchasing equipment or making deposits. This part of the cash flow statement calculates the difference between cash spent and cash earned on investments made for the business.

For small businesses, this section will probably be brief. A local restaurant owner may buy a new soda machine. However, they probably aren’t concerned with cash flow resulting from a merger with another company.

Think of the investing activities section as items that typically result in a change in long-term assets for the company.

Cash flow from financing activities

This section of the cash flow statement records money from raising capital or repaid to investors and transactions involving debt. Think of financing activities as things that involve a bank or an investor. Some examples include opening a line or credit or repaying a loan, distributing money to investors, or raising additional capital.

While some of the cash used to repay debt is accounted for on the income statement (interest payments), a large portion of debt repayments (principal payments) won’t show up. In other words, this can be a major cash outflow that is never tracked on income statement. Likewise, when a company takes out debt, this is a major cash inflow of the company. However, the income statement can’t help explain why cash increased when this happens.

Why is your monthly cash flow statement important?

So, we know what a cash flow statement is and how to interpret it. Why is it important, and why should you spend time reviewing it? Among other things, a cash flow statement enables you to:

Plan for the future, in both the short and long-term

Running a pizza business and think that a new dough mixer would be a wise investment? It may well be, but you should be sure before making a commitment, and your cash flow statements are the key.

Small business owners need to know that they will have the cash on hand to keep operating today and for the future. If this kind of planning seems overwhelming, consider hiring out the services of an accounting professional. A virtual CFO can use your cash flow statements to plan a financial strategy that keeps sufficient cash on hand while still budgeting for growth.

Present proof of your company’s financial position

Your cash flow statements are the definitive proof of your company’s financial health. Imagine that your business needs capital to continue growing, and you are seeking a loan or new line of credit. Banks will want to know that you can meet your potential responsibilities, and will review your cash flow statements for confirmation. In addition, as your business grows you may also court investors who will want to know the operating cash flow of your business.

Streamline your operations

Running a business is complicated and it can be difficult to spot inefficiencies in your operations. However, a cash flow statement breaks things down in a clear way, so that you can see if your inventory management is too expensive or your payroll is too costly.

An expert in accounting and finance will be able to review your statements and streamline your cash flow. If you find yourself hoping that you didn’t spend too much on supplies last month or wondering whether your income will cover expenses, consider hiring out an accounting services professional.

How Krieger Analytics can help

Krieger Analytics specializes in outsourcing accounting services for small businesses, from bookkeeping to virtual CFO consultations. Our background in entrapuernship and finance means we know what running a business entails. We want to meet your accounting needs without burdening you with the costs of a full-time accounting staff. We understand your position as a small business owner, because we have experience running businesses ourselves.

Have questions about anything discussed in this article, or are interested in what valuable insights a CFO has for your business? Conversations are free, so don’t hesitate to reach out at [email protected]. Let us explain how our services could be the right fit for you.