Cash Flow Statements: What Your Business Needs to Know

oes your business have enough cash to pay its expenses for the next few weeks or months? What about your owner’s draw (or salary)? If you’re unsure, it might be time to analyze (or create) your cash flow statements. Doing so will help you understand the inflows and outflows to help you make crucial business decisions. For instance, if you don’t have enough liquid cash (even if you’re profitable), it might be hard to pay the bills, potentially ruining your business’ health.   With that in mind, let’s dig deeper into what you should know about your cash flow statement.

What is a Cash Flow Statement?

In a nutshell, a cash flow statement is a financial statement that looks at the amount of money you’ve got coming in and paid out. Business owners can look at these inflows and outflows over a predetermined period of time, whether that’s over a month, quarter or year.   This financial statement helps businesses look at how well they’re managing their cash. As in, it looks at whether there is enough cash that’s generated to fund operating expenses and ongoing debt obligations.

Why is a Cash Flow Statement Important?

An up-to-date cash flow statement is important so that you can use the data to analyze the health of your business. It can help you predict how much cash there is left at the end of every month to ensure there is enough to keep your business running smoothly.   If there isn’t cash, a business may need to dip into their savings or be forced to take out a loan. However if your business consistently generates more money than is going out, it means your business may be able to take more risks. Meaning, your business can pay off debt and increase assets fairly easily, therefore you can use some of it to fund business growth.   A cash flow statement is also important if you’re looking for outside investors for your small business. Investors will want to determine whether your business can stand on its own — how well can it earn money and pay back obligations? The healthier your business from a cash flow perspective, the more likely an investor is willing to invest in your business.  

What Do I Need to Include in a Cash Flow Statement?

Even though small businesses will earn revenue in various ways, a cash flow statement is generally divided into three components: cash from operating activities, cash from investment activities, and cash from financing activities.  

Cash From Operating Activities

This section will include how you earn and use cash from your business activities. Income includes cash from goods and services sold and interest earned. Cash outgoings can include salary payments, income taxes, vendor invoices, rent, debt repayments, and other kinds of regular operating expenses.  

Cash From Investing Activities

Investing activities are any inflows and outflows of cash from your business investments. You can include loans made to suppliers or customers, a sale or purchase of an asset, and any payments for a business acquisition.   For example, if you purchase new equipment to expand your screen printing business, you’ll include it in this section.  

Cash From Financing Activities

Here, you’ll include sources of cash from banks or investors. You’ll also need to include any cash you pay back to investors, such as repayment of the loan principal or buy back of shares in your business.   If you raise money for your business, it’ll count as cash coming in, but it counts as cash going out when you pay back investors or banks.  

How Do I Calculate Cash Flow?

The two methods of calculating cash flow are the direct and indirect methods. The direct method takes into consideration all cash inflows and outflows — think receipts from customers, ones paid out to suppliers and employees. You’ll arrive at a final calculation by looking at the beginning and ending balances from your business accounts, then analyzing the net increase or decrease.   The indirect method looks at the business's net income, or results of a profit and loss statement to determine cash flow. Since an income statement recognizes income when it’s earned, it’s not as accurate. That means you’ll need to adjust your earnings before interest and taxes for any items that will affect your business's net income and any non-operating activities that don’t directly affect cash flow.   For example, depreciation (such as for equipment you purchase for the business) doesn’t count as a cash expense but is added back into your net sales since the value of the asset has already been accounted for.  

Example of a Cash Flow Statement

Here’s a quick look at what a cash flow statement looks like:        

‍Cash Flow from Operating Activities    Net Earnings $200,000  

‍Increases in Cash    -Payroll $20,000   -Suppliers $15,000   -Taxes $2,000  

‍Decreases in Cash    -New inventory ($10,000)  

‍Net Cash from Operations $247,000  

‍Cash Flow From Investing    Equipment ($2,000)  

‍Cash Flow From Financing    Loan repayment $20,000  

‍Cash Flow for EOY 2020        $265,000

What if I Have a Negative Cash Flow Statement?

Having a negative cash flow statement doesn't necessarily mean your business is in trouble. It does mean, however, that you need to look further into why that may be. In some cases, having a negative cash flow is because you’ve made a number of investment decisions which temporarily affected how much cash you have left over by the end of the month. Since an investment’s goal is to encourage growth and expansion, you probably don’t need to be concerned.   Looking at changes in cash flow from successive statements is helpful since it gives you a bigger picture of how your business is doing. If your business is consistently experiencing a negative cash flow, then you’ll need to address this red flag.  

Create Your Cash Flow Statement Today

Creating a cash flow statement is a valuable use of your time since it helps you measure your business’ long-term outlook, strength, and profitability. It will show you whether your business has enough cash to pay its expenses and other financial obligations and predict future cash flow. Analyzing these statements closely over a period of time will give you a more solid understanding of your business health, and whether you can afford to invest in its growth.