🤑 Let's Talk About the Cash Flow Statement!
How to review and read your cash flow statement as a business owner
For the past two weeks, I have written about reading and understanding your financial statements—Income Statement, Balance Sheet, and Cash Flow Statement. Today’s post is on the Cash Flow Statement. What is it? How do you read it? What does it tell you about your business?
The Cash Flow Statement shows how much cash you have left after accounting for your cash inflows and outflows. Cash is different from your net income. It’s possible to have a positive net income and be low on cash. This is due to cash payments that are not tracked on the income statement but are on the balance sheet, like loan principal payments, credit card payments, owner’s pay, buying a building, or inventory purchases. All of these things take cash! Therefore, you can’t just take your income statement at face value and automatically think you’re doing great. You could be heading to bankruptcy.
There are three main sections to a cash flow statement:
Operating Cash Flow
Investing Cash Flow
Financing Cash Flow
Operating Cash Flow
Operating cash flow includes your net income plus any net increase or decrease in your accounts receivables, inventory, and accounts payables. This is truly the cash needed to operate the business daily. If you have more customers this month, you’ll have a net increase in accounts receivable than last month, or if you owe fewer vendors this month, you’ll have a net decrease in accounts payable. If you buy more inventory, you’ll have a net increase in inventory amount balance than last month. This section shows you the effects of your daily business operations on your cash flow.
Investing Cash Flow
Investing cash flow includes purchases of equipment, plants, buildings, vehicles, or other long-term assets. This section shows the effects of reinvesting in the business to help it grow and expand. So, any cash used for this investing activity will be added here, or if you sold an asset, the asset amount will decrease as there was a net decrease from the previous month.
Financing Cash Flow
Financing cash flow includes loans, investor funding, or owner investments. Any external funding activities will be recorded here. If you decide to give out stock or dividends, these amounts will be shown in this section. Any net increase or decrease within the equity section of your balance sheet shows up here on your cash flow statement.
The cash flow statement makes sure you have enough cash in the bank to pay your operating expenses for the next month or year. Adding up the three sections shows your ending cash balance for that period. Accounting software such as Quickbooks Online and Wave already have these financial statements ready. You just have to run the reports and review them. Keeping track of your cash will ensure you’re proactive in avoiding bankruptcy as much as possible. It’s perfectly possible to have a ton of revenue but still not have the cash to keep the business going.
🔜 The next post will discuss the tools you can use to pay your vendors and employees.
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😁 Disclaimer: I'm not your employee or finance consultant, so all business decisions are yours.
Woolichooks provides finance consulting services, which include setting up finance software systems and processes to enable companies to scale for growth.