What is a Cash Flow Statement?

Your income statement tells you how much money you made or lost during a given period. Your balance sheet shows, among other things, how much cash you have on hand at a given moment. But how do you determine where that money came from, and more importantly, where it went? Answer: a cash flow statement!


Cash flow statements reflect the amount of cash and cash equivalents coming into and going out of your business. If you have business stakeholders, you can use the cash flow statement to show where cash came from and how it was used. Since the statement only reflects transactions that directly affect cash receipts and payments, you won't see references to depreciation, bad debt write-offs and credit losses. A cash flow statement gives you a sense of your company's health and your ability to respond to opportunities or challenges quickly.

Breaking Down the Cash Flow Statement

The cash flow statement is divided into three sections: operational cash flow, investment cash flow and financing cash flow.

Operational Cash Flow - Measures the cash flowing in and out of your business based on operations. Selling a product or service provides an inflow of cash from operations, while paying suppliers and employees are examples of cash outflows from operations.

Investment Cash Flow - Investing activities include buying (cash outflow) and selling (cash inflow) assets used to generate business. Examples include buying and selling equipment or stock, and lending money and receiving loan payments.

Financing Cash Flow - Financing activities include borrowing and repaying money, issuing stock or equity, and paying dividends.

Viewing all three sections together provides information on company growth. Is your business investing surplus operational cash flow back into the business? Or are you investing in new equipment, assets, and other opportunities to grow in the future? Are you financing the growth or is it happening organically? Having this information at your fingertips helps you identify areas where you are already doing well and where you can improve.

Why a Cash Flow Statement is Useful

Like your other financial statements, the cash flow statement serves as a communication tool, providing valuable business data. For example, negative cash flow from operations, especially for an extended period of time, might indicate that your product or service is under-priced, your operational expenses are too high, or that you have too many accounts receivable. Armed with this knowledge, you can take steps to improve your business practices and support future growth.

Viewed in context over time, the cash flow statement is the best tool to measure your company's liquidity, solvency, and your short-term viability. This information is particularly helpful when evaluating your ability to pay bills. Additionally, when an obligation or investment opportunity arises, you'll know exactly where you stand. And since using cash is much easier and quicker than selling an asset or obtaining financing, you'll already have the information you need to make a decision.

Your cash flow statement is an effective and necessary part of the full set of financial statements you should be looking at on a regular basis. As you manage your company's finances, the cash flow statement will be one of your most powerful financial reporting tools.

More questions on cash flow statements? Contact us here, and we'll be happy to answer!



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