Explaining a Cash Flow Statement

A cash flow statement shows how much cash is moving in and out of your business over a certain period of time. It reflects your business’s liquidity. Having the available cash to pay your debts and buy materials and assets are an important part of planning your business. The most crucial number of your cash flow statement is the final figure found at the bottom of your statement: your net cash flow.  You may compare the net cash flow from a number of periods to see whether it is increasing, decreasing, or staying static.

The cash flow statement can show if your business is consistently generating more cash than it is using. If this is the case, this means that you will be able to reduce your debt, increase your earnings, or purchase new assets to improve your company’s performance. All very positive outcomes.

If your cash flow statement is negative, the statement will show you why the net income you are reporting is not turning into cash. I.e. you will be able to see where you are spending too much cash, or are not receiving enough cash.

There are three different sections to a cash flow statement:

  1. Cash flow from operations
  2. Cash flow from financing
  3. Cash flow from investment

Cash flow from operations – This section contains the main cash-generating activities of your business. This will normally include the normal everyday money earnt or spent in your business. The largest figure should be the net income generate by your business. Accounts receivable (money owed to you) will be included in this section, as well as accounts payable (money you owe). The final number you receive from cash flow from operations can be positive (a good outcome), or negative (a bad outcome).

Cash flow from financing – This section measures the flow of cash between your business, its owners, and its creditors. It reports changes in the balances of long-term liability and owner’s equity. Cash income can include any borrowed funds. Cash expenditure can include loan repayments.

Cash flow from investing – This section reports changes in the balance of long-term assets accounts. Changes include purchasing or selling long-term assets. For example, land, buildings, equipment, long-term investments, and vehicles.

Some other important terms in the Cash Flow Statement:

Liquidity – This term describes whether an asset can be quickly turned into cash. Assets that can be quickly bought or sold are considered liquid. It is important to have very liquid assets in case your business goes under and you are quickly required to pay off a liability.

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