June 15, 2018

Here is the final article in our 3-part series, “Understanding your financial statements”, and this month we’re looking at the cash flow statement (CFS).

If you’d like to review Part One & Part Two in this blog series, you can do that here:

Balance Sheet (Part One)

Profit and Loss (Part Two)

What is a cash flow statement?

Without cash, your business would likely not be in operation. A cash flow statement (CFS) tells you where your money is going and helps you get a good sense of whether your business is financially healthy or headed for trouble.

The CFS is essentially a summary of the money coming in and going out of your business over a particular time frame. It’s like a bank statement, but with insights into patterns and/or problems.

Sample Cash Flow Statement

Key equation on cash flow statements: net change in cash = operating cash flows + investing cash flows + financing cash flows.

There are five parts to a cash flow statement:

  1. Cash flow from operations – the comings and goings of cash related to your core business. If your operating cash falls short, you’re not earning enough to cover costs in your day-to-day business.
  2. Cash flow from investing – This shows the comings and goings of cash if you buy and sell things like shares in the financial market, land or intellectual property. It also includes any one-off sales of long-term assets such as a work vehicle.
  3. Cash flow from financing – The cash you receive from taking out a loan, and the cash your business spends repaying long-term debt. This total is after all transactions related to financing are tallied.
  4. Closing cash balance – The balance is the operating, investing & financing cash flow totals plus the opening cash balance. This then becomes your opening cash balance on the next period’s CFS.
  5. Net change in cash – The difference between your opening and closing cash balances.

If your CFS closing balance is positive, it shows your business can carry out its day-to-day activities without sinking into unplanned debt.

A negative closing balance may not be anything to worry about if your business is going through a period of growth or investing in a project. But several statements in a row with a negative net change in cash is a cause for concern and worthwhile investigating further.

If you have questions around your financial statements, give us a call. We keep things simple, so you’re not bogged down by accounting jargon and we speak a language you can understand.

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