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Everything You Need to Know About Cash Flow Statements

Learn the terms and definitions related to cash flow statements.
Find out why cash and cash equivalents are important to report.
Cash flow analysis is used for many financing activities, like applying for loans.
Accounting software usually includes a cash flow statement report, but you can also create your own in Excel using a cash flow statement template.

The financial side of business ownership can be a challenge for small business owners in the early stages of company growth. Many entrepreneurs are excellent at what they do but don’t have formal backgrounds in business administration or finance. Limited time and funds can add to the frustration small business owners feel in financial management.

Cash flow is one of the biggest concerns for any business owner, so cash flow statements are the first financial statements many new business owners attempt. These basics can help you establish the financial tracking and reporting you’ll need to create cash flow statements and get a handle on what’s coming in and what’s going out.

The importance of cash flow

Inadequate cash flow can be a death knell to a fledgling business. In past surveys, we’ve found that cash flow is one of the single most important issues to small business owners in all industries and regions, but it matters to outside investors and lenders too. In fact, many common financing activities require business owners to provide financial statements, including a statement of cash flows.

While the financial health of a company shouldn’t be evaluated on one number alone, cash flow is a valuable data point when looking at a business’s ability to operate efficiently, pay bills and grow. Cash flow statements are widely considered one of the most important financial statements a business produces. Additionally, tracking cash flow can help businesses make more accurate cash flow projections and plan for the future.

 

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The definition of cash flow

As with anything related to financial math, understanding terms is half the battle. In addition to standard terms like “cash flow,” you may come across terms like “negative cash flow” and “cash flow from operations.” Here’s what those phrases mean.  

Cash flow

Cash flow refers to the money going into and out of a business over a period of time, often reported on a quarterly basis. Cash flow includes outgoing money like the cost of operations and working capital and incoming money from sales or contracts.

Cash flow is more informative than profit alone, because it gives a fuller financial picture of a company’s expenses, debts and assets. Not all assets are part of cash flow, however; only very short-term investments (typically bonds with a maturation time of three months or under) should be considered part of cash flow. Longer-term investments are not considered part of a company’s cash flow, since invested money is usually not immediately accessible and can fluctuate with the market.

Positive cash flow

Positive cash flow is when a company’s incoming cash exceeds its outgoing expenses. Reaching a positive cash flow point is a major milestone for new businesses.

Negative cash flow

If your statement shows negative cash flow, this means that during the period being evaluated, your business sent more money out than it took in. This does not necessarily mean a business is in peril. Some businesses routinely go through a negative cash flow period during certain times of the year due to business seasonality. Many new businesses also go through a phase of negative cash flow as they establish themselves.

Net cash flow

The difference between outgoing cash flow and incoming cash flow is referred to as “net cash flow.” In other words, net cash flow represents the change in your business’s cash holdings over whatever period is covered on your statement of cash flows. Tracking your business’s net cash flow over time can be helpful.

Free cash flow

A company’s free cash flow is the money left over after it has paid all expenses and reinvested money in the business (such as by purchasing equipment or hiring new staff as well as making financial investments). Free cash flow is usually of interest to shareholders and often included on a cash flow statement.

Operating cash flow

Operating cash flow is the money a company generates from its business activities alone (not from investors). This is an essential item on a cash flow statement, because it’s an excellent indicator of the strength of a business.

What is a cash flow statement?

A cash flow statement, also called a statement of cash flows, is a financial document that shows the way money is flowing in and out of a business. Common financing activities such as securing loans or applying for investment capital may require this and other types of financial statements. Cash flow statements are used to evaluate the financial health of a business as well as to provide a full picture of how it spends and invests the money it already has. [Read related article: How to Start Budget Planning for Your Business]

Sections on a cash flow statement

To understand the cash and cash equivalents flowing through your business, you’ll need to put together a cash flow statement, which is usually split into three sections. These are the most common terms, but there may be some variation by industry and region. Here’s what each section typically covers:

Cash flow from operating

Often titled “Cash Flow From Operations,” “Cash From Operating Activities” or something similar, the “cash flow from operating” section of a cash flow statement is usually first. This section typically covers the cash coming in from sales or contracts as well as the cash going out to cover operational expenses, like those related to manufacturing, taxes and staff. 

Cash flow from investing

The investing section states capital expenditures, acquisitions and divestments. Expenditures and acquisitions are both cash outflows, while divestments are cash inflows. This section is often titled something like “Cash Flow From Investing.” It’s not unusual for this section to primarily consist of cash outflow, as many thriving businesses spend more money investing than they do cashing out investments.

Cash flow from financing

This section is often titled “Cash Flow From Financing Activities” or something close to that. In this section, you’ll detail the way your company is funded and distributes its funds. Data in this part of the cash flow statement might include transactions concerning company debt and equity. If your company pays dividends to shareholders, you would note that in this section as well.

How to create a cash flow statement

Most good accounting software applications have a preconfigured report for cash flow statements. You can also find a cash flow template online if you’re not yet using accounting software and need help using a spreadsheet to create one. If you use a cash flow template, make sure you choose one that matches your needs and your reporting schedule.

Another option is to create your own cash flow template for companywide use, basing it on published templates and other companies’ statements. All publicly traded companies are required to publish certain financial statements, including cash flow statements, so you can also look at those for ideas.

Other types of financial statements

Financing activities like applying for loans or courting potential investors often require several financial statements. In addition to a cash flow analysis or cash flow statement, these three documents may be required, depending on the nature of your business and the financing activities you’re pursuing:

Balance sheet
Income statement
Statement of shareholder’s equity

Accounting resources

Creating financial statements and setting up your financial tracking is no small task. These accounting resources are reliable and bound to be a valuable addition to your accounting toolkit.

Accounting software

Accurate tracking is the single biggest task when it comes to managing your business’s finances. Without accurate tracking, even the best cash flow template, income statement or balance sheet will be useless. Accounting software to help you manage your financial tracking should pay for itself in no time. Our guide to accounting software for small businesses can help you find a solution that works for your business and budget.

Securities and Exchange Commission

The U.S. Securities and Exchange Commission publishes a lot of helpful guides, including a very accessible guide on how to read a financial statement. If you’ve never read a balance sheet or put together a profit and loss statement, it will give you the background you need.

Read more: business.com

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