One of your core responsibilities as a business owner is being constantly aware of the financial health of your business. Needless to say, you need to maintain thorough and accurate bookkeeping, but the books themselves don’t necessarily give you a complete picture of the overall health of the company. However, a few standard financial reports will provide invaluable insight in this regard. Along with your Profit and Loss Statement and Income Statement, your Cash Flow Statement is an essential ingredient in the soup of information that will help you understand your business’ finances.
What is a Cash Flow Statement?
The “official” name for a cash flow statement is the “statement of cash flows”. Whatever you call it, it’s the report that shows the amounts and sources of cash generated in a specified time period as well as how and where that cash was spent. The time period that the cash flow statement covers can be chosen at your discretion, most commonly a fiscal year or quarter.
What goes into the cash flow statement?
The cash flow statement itemizes and reports all the cash you’ve generated and used, and organizes that data into the following broad categories:
- Operating Activities - These include the production and sales of your products, and also payments you’ve received from your customers. It also includes adjustments for items that are added back or subtracted from your net income, such as depreciation, amortization, deferred taxes, and dividends received.
- Investing Activities - These refer to the purchase or sale of long term investments, including real estate, buildings, equipment, and securities, as well as loans (both those given and received), and payments related to mergers and acquisitions.
- Financing Activities - This category includes cash received from investors, including banks or shareholders, as well as dividends paid out to shareholders.
What can you learn from the cash flow statement?
In the most general sense, the cash flow statement provides you with a snapshot of your business’ liquidity. Your income will show whether you’ve been producing a profit, but not necessarily whether you’ve got enough revenue to cover all of your expenses. The cash flow statement gives us the information needed to determine that, including:
- Information regarding your liquidity and solvency
- Information that will help you evaluate changes in your assets, liabilities, and equities
- The amount and timing of your future cash flow
- Eliminate the effects of using different methods of accounting, for a clearer understanding of operating performance.