A cash flow statement is an essential financial statement for a business. As its name suggests, it provides a summary of the amount of cash and cash equivalents that come and go in the course of running your business.
Download this cash flow statement example to get started on yours.
“A business could be profitable but at the same time have cash flow problems” says Jo-Ann Yuen, Vice President of Finance at Nav. “Depending on how severe the cash flow problems are, this could even lead to business failure. One cause could be poor accounts receivable practices, which means that we are not collecting payment from customers and therefore might have problems in turn in paying creditors.”
The statement of cash flows helps you know what your cash position is at all times, which is essential to making sure that you have enough money to pay your expenses. “A cash flow statement identifies the cash inflows and outflows and ultimately if there is enough cash in the bank to support the daily business needs” explains Yuen.
Things that you’ll see on the cash flow statement example
A cash flow statement shows how changes in your balance sheet accounts and income affect the balance of your cash and cash equivalents. You’ll typically see a cash flow statement broken down into three categories: operating, investing and financing.
With these three sections, you’ll have a bird’s eye view of where your cash comes from and how it’s spent. This kind of breakdown also makes it easier to know where to make changes if your cash flow is in trouble.
Operating cash flow
Your cash flow from operations can give you a good idea of your ability to expand your business, launch new products or services or reduce your debt.
This section of your statement of cash flows covers your regular day-to-day operations. That includes your funds from operations and changes to your working capital. In this section, you’ll typically see the following line items:
- Changes to inventory
- Changes to accounts receivables
- Changes to accounts payable
- Insurance premiums
- Business taxes
- Depreciation and amortization
- Short-term debt payments
Changes to certain accounts on your balance sheet can have different effects on your cash flow statement. For example, you’d record an increase in inventory or accounts receivable as a cash outflow, while an increase in accounts payable would constitute a cash inflow.
Because every business is different, your statement of cash flow from operating activities may differ a little from another business owner’s. Focus on your revenue-generating activities from your core business operations, and you’ll have everything you need.
Investing cash flow
In this section, you’ll see how much cash you’ve generated or spent on certain investment-related activities, such as buying physical assets, investing in securities or selling securities or assets.
Line items you’ll typically see in this section include:
- Purchases of physical assets
- Purchases of stocks, bonds or other securities
- Loans your business has made to others
- Sales of physical assets
- Sales of stocks, bonds or other securities
- Loan payments you’ve received
As you might guess, buying assets or securities and loaning money to someone else would result in an outflow of cash, while selling assets or securities and collecting loan payments would give you a cash inflow.
Positive cash flow from investing activities may indicate that your business is doing well with its investment activities, but it can also be a sign that you’re not investing enough in long-term growth through research and development. On the flip side, negative cash flow from investing activities isn’t necessarily a bad thing if you’re investing in your future.
Financing cash flow
As the name suggests, your cash flow from financing activities covers your net flow of cash used to fund the company. On a broad scale, this includes debt, equity and dividends. The section gives you an idea of how well you’re managing your debt and how strong the company is financially.
Possible line items include:
- Proceeds from long-term debt such as loans or bonds
- Payments on long-term debt
- Issuance of stocks or equity
- Dividend payments
- Stock repurchasing
Anytime you issue some form of equity or bonds, that will result in a cash inflow, and payments on debt or dividends and the repurchasing of stocks will give you an outflow of cash.
As you read this section, it’s important to look into each line item to understand what it means for the company. More specifically, think about how your financing activities affect your long-term growth versus satisfying short-term needs.
Tips on how to read a cash flow statement
Your business’ statement of cash flows is incredibly important for understanding the health of your company. Here are some tips to help you as you build and read yours.
- It’s over a period: Unlike your balance sheet, which shows the state of your assets and liabilities for a specific point in time, your cash flow statement shows your inflows and outflows of cash for a set period. If you’re trying to analyze the financial health of your business, consider looking at different periods to see trends.
- Look at each line item: If you’re only looking at the total cash flow in each section, you’ll get an accurate view of your cash position, but you won’t get a real idea of where the cash is coming from and where it’s going. By checking each line item, you’ll get a more comprehensive view and help you determine where to make changes if needed.
- Put it in context: Your cash flow statement is just one of many financial statements for your business. While it incorporates information from your income statement and balance sheet, it only focuses on the cash flow aspect. Use all three to get the full scoop on how your business is doing financially.
The bottom line
A cash flow statement example can help you start the process of creating a statement of cash flows for your business. As you use a template, though, be sure to tailor it to your business. For example, you may not have issued any equity or bonds, or you might have certain operating activities that are unique to your business or industry.
Also, remember that while your statement of cash flows is for a specific period, it’s best to have one at all times. While a template can help you get started, consider using accounting software to calculate your cash flow on an ongoing basis.