Are you fully aware of how your business generates and uses cash? The statement of cash flows (or cash flow statement) is a powerful tool that provides clear insights into your business’s financial activities over a specific period.
This essential financial report tracks all cash receipts and payments—money flowing in and out—broken down by category. The result is a net increase or decrease in cash for each activity, giving you a transparent view of your business’s liquidity. By adding the net changes across all categories to your starting cash balance, you’ll get the final cash on hand figure at the end of the reporting period.
Understanding the cash flow statement is crucial when combined with your Profit and Loss statement and Balance Sheet. Together, these reports offer a comprehensive view of your business’s financial position and performance.
How Does the Cash Flow Statement Work?
The cash flow statement integrates the information from both your Profit and Loss statement and Balance Sheet to provide an up-to-date cash position. Unlike the other financial reports, which are typically based on accrual accounting, the cash flow statement operates on a cash basis. It adjusts accrued income from your Profit and Loss statement into actual cash, based on changes in your asset and liability accounts.
Key Report Categories
The statement of cash flows is divided into three main sections, each representing a different type of business activity:
Operating Activities: Cash flows related to your core business operations, including income, expenses, assets, and liabilities—excluding those classified under investing and financing activities.
Investing Activities: Cash flows from the purchase and sale of long-term investments, property, equipment, and deposits, as well as dividends received.
Financing Activities: Cash flows related to equity transactions such as issuing or repurchasing stocks and bonds, as well as paying dividends and loans.
Many formal financial reports also include Notes to the Financial Statements, offering further details on activities not involving cash transactions, risk management, employee provisions, and more.
Why is the Cash Flow Statement So Important?
The cash flow statement provides critical insights into the health and future prospects of your business. It highlights:
- Your business’s cash position and ability to meet obligations.
- The relationship between your assets, liabilities, equity, and cash accounts.
- Cash generation trends and how they align with your overall performance.
Unlike the Balance Sheet or Profit and Loss statement, which reflect financial data at a specific moment, the cash flow statement shows movements and changes over time, offering a clearer picture of your financial trajectory.
What Can You Learn from the Cash Flow Statement?
With a thorough analysis of your cash flow statement, you’ll gain valuable answers to key business questions, such as:
- How strong is your cash position?
- What is your long-term financial outlook?
- Which activities are generating the most cash flow?
- How does your net income compare to your operating activities?
If you want to dive deeper into your financial statements, cash position, and future prospects, schedule an appointment with us today. We’ll help you better understand the strengths of your business and how to leverage them for growth and stability.
