Cash Flow Statement

In short, a cash flow statement is a financial statement that summarizes how much cash and cash equivalents come in and out of a business. Since 1987, this document has been a mandatory part of any company’s financial reports.

How to Use a Cash Flow Statement

Entrepreneurs and business owners tend to use their cash flow statement to see if they’re generating enough cash to pay off any debts they’ve incurred. It also indicates whether there’s enough cash flow to fund their business expenses.

More often than not, investors want to see your cash flow statement to get a feel for how well your business is operating as well as understanding how you’re spending and earning your money. With this information at their disposal, it’ll help them deduce whether your company’s on a solid financial footing.

Not to mention, you can also use this statement to predict future cash flow which undoubtedly comes in handy for budgeting your business’ finances.

How a Negative Cash Flow Works

Just because you have a negative cash flow doesn’t necessarily mean your business isn’t financially stable. Sometimes your statement shows a negative cash flow because you’re in the middle of expanding your operations, which, in theory, should produce higher profits later down the line.

Cash Flow Statement vs. Balance Sheet vs. Income Statement

Your cash flow statement is an entirely different document to your balance sheet and income statement, however, it’s used to complement these two other financial reports. The main difference is that a cash flow statement doesn’t approximate the amount of cash coming in and out of your business that’s been recorded on credit. As such, cash flow isn’t the same as net income, which takes into consideration both cash sales and sales made using credit (which is a figure included on both income statements and balance sheets).

What Cash Flow Statements Look Like

The main things highlighted in any cash flow statement are as follows:

• Cash coming in from business operations
• Money coming in from investments
• Cash coming in from financing activities

What do we mean by “business operations?”

Your business operations include all sources of cash from business activities. That’s in addition to the uses of all cash generated from your company’s activities. For example:

• Cash generated from selling your products and services
• Interest payments
• Income tax payments
• Payments made to your suppliers and vendors
• Payments to your employees

The figures surrounding your “business activities” give you a better idea of how much your company generates from the products and/or services you sell.

Also, all of the following is usually reflected in this section:

• Adjustments made in cash
• Accounts receivable
• Depreciation
• Inventory
• Accounts

Whereas, cash coming in from investments refers to any source of cash you’re making (and using) from your business investments. To put it simply, this section details any changes in equipment, assets, or investments that relates to your cash investments. For example:

• Purchasing an asset
• Selling an asset
• Loans made to vendors
• Funds related to mergers and acquisitions

Last but not least, financing activities pertain to cash received and used from investors, banks, and shareholders. This includes the payment of dividends, stock repurchases, and the repayment of loans.