What is a Cash Flow Statement?

Keeping an eye on the money flowing in versus the cash flowing out, that’s the hub of small business financials. And the document that gets that done is called a cash flow statement.

This statement helps small businesses see where cash flows in from and how it gets spent. They’re an important way to manage finances.



What Exactly is a Cash Flow Statement?

These cash flow statements are a big part of financial accounting. They are also called statements of cash flows.

Wondering what is cash flow? These financial statements break down into financing, investing, and operating activities. They include a company’s net income, and there’s a method to calculate how much cash is available.

Wondering what is a P&L statement and how these fit in? These provide further insights into the cash flow. Read on to find out what goes into one, how to calculate cash flow and other important aspects.

Positive Cash Flow Vs. Negative Cash Flow

The best way to avoid a cash flow problem is to understand the differences between the types. And how each affects a company’s financial health.

  • a negative cash flow describes a situation where a small business spends more than it brings in.
  • A positive cash flow is the opposite. More money is coming in than going out.

Businesses that experience negative cash flow might be waiting on payments. Offering early payment discounts can foster a positive cash flow.

Purpose of a Cash Flow Statement for Small Businesses

A cash flow statement shows how cash and cash equivalents move through an enterprise. It’s an overview of cash generated. It provides an overview of business operations by complementing the balance sheet and income statement.

Been wondering “What is a balance sheet?” or “What is an income statement?” The first shows what a business owns and owes. The second term highlights what it did. Both work with a cash flow statement to provide a clear picture.

Here are four more uses for these financial statements.

To Plan Repayment of Loans

Understanding the cash flow can help your company decide how to fit these payments in. And for capital expenditures and budgeting decisions that need to be made after looking at the flow statement.

To Gain Insights Into Spending

These provide a picture of the cash payments that might not be found in the profit and loss statement. A good way to get a precise picture of the real cash position with what’s on a balance sheet.

To Get A Better Picture of Your Cash Balance

Calculating cash flow is essential. They provide a good snapshot of cash flow activities. Whether there’s enough cash in your bank accounts for any accounting period. Be precise. For example, gross cash receipts include costs and expenses.

To Manage A Crisis

Financial statements that include cash flows and cash equivalents report on excesses or shortages. Predicting issues with cash flows can lead to proactive plans. Like taking an early look at the payable accounts.

Main Components of a Cash Flow Statement

A company’s cash flow needs to check a few boxes. This kind of financial analysis must have everything from noncash expenses, to investing numbers and receipts to name a few.

Here is a list of some of the main components.

1. Operating Activities

The operating activities are often the first section. It measures cash earned and used by a company. The company’s financial statements here include accounts receivable, unearned revenues, and noncash items like prepaid insurance.

This section details how the company generates cash.

2. Investing Activities

This section detailing investing activities includes fixed assets and it shows investment gains and losses. Land and buildings, vehicles, and other long-term investments are included to come up with an investing cash flow. Purchases or sales of equipment and property also count.

3. Financing Activities

Another important part of a cash flow picture is reporting all the money spent to repay lenders and borrowers. These fall under the financing activities cash outflow umbrella.

4. Net Income Figure

Each statement starts with the net income, or the net cash made. It’s the big one, gauging the company’s ability and how good they are at generating cash.

5. Operating Expenses

These expenses happen during normal business operations, so be careful with these. Cash paid in wages or salaries to full-time staff are operating expenses on a company’s balance sheet. Legal fees, accounting services, office supplies, and utilities also count.

6. Non-Operating Expenses

These appear at the bottom of an income statement which includes costs that aren’t tied to the day-to-day. Like interest paid on bank charges and amortization plus depreciation.

Cash Flow Statement Example

It’s easier to understand a cash flow statement with an example.

QuickBooks supplied this template. Note that some noncash revenue like appreciation needs to be included.

How to Prepare a Statement of Cash Flows

Trying to predict future cash flows hinges on a detailed statement. Here are some steps you can take to that end.

Remember to follow the generally accepted accounting principles (GAAP). Numbers need to be accurate and include operating income for income taxes.

  • Gather The Information and Data – put together contracts files and documents to arrive at a net cash flow.
  • Find A Starting Balance – should include the balance of cash equivalents and cash disbursements.
  • Calculate The First Cash Flow – this number comes from operating activities.
  • Do The Same For Investing Activities – the focus is on the buying and selling of equipment, facilities, and property.
  • Calculate Cash Flow For Financing Activities – Payable notes are included. Like paying back debts to creditors and investors. Financing cash flow numbers should reflect each fiscal period.

Analyzing a Cash Flow Statement

A good financial statement analysis will cover sales transactions that are not cash too. It can help put the pieces together when you’re looking for more cash.

Use the Direct Method

The direct method is simple, just subtract cash outflows from cash inflow. The actual cash flow examples include what’s paid to suppliers.

Use the Indirect Method

This one is a little less straightforward. Take net income and then work in depreciation. The indirect method takes into account noncash transactions like amortization and fixed sale losses.

Look To Operating Cash Flow / Net Sales

This is a ratio highlighting how much cash gets generated for each sale. It’s expressed in dollars.

Calculate Free Cash Flow

This shows how good a small business is at generating cash. Calculate free cash flow from a statement of cash flows. Take operating cash flows and subtract capital expenditures.

Analyze Unlevered Free Cash Flow

This is a company’s cash inflows before items like interest payments are factored in. Here is the formula.

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