All About Cash Flow Statements and Why You Need One

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Cash flow is sort of like a monster under the bed. It’s tempting to pretend that it isn’t there, but that won’t solve your problem. Only one anti-growth serum will help you swap fear for financial security: cash flow statements! 

A cash flow statement helps you work out what to put towards your operational costs as well as potential investments, and gives you insight into the liquidity and solvency of your company. 

In other words, it helps you make educated financial decisions, and keep things running smoothly while you grow. What could be more important than that? 

If the phrase “cash flow” makes your palms sweaty, it’s time to face your fears and learn to harness the power of these nifty documents. The purpose of your statements is to summarize your incoming and outgoing cash and measure how well your business generates cash – NOT to leave you nervous and jittery. 

How exactly do you deal with a *monstrous* task like understanding and using cash flow statements? 

You start by breaking it into pieces, so here they are: the components of a cash flow statement: 

Cash from operating activities

Look here when: you want to know how much cash your business activities are generating. This includes changes to your cash, accounts receivable/payable, depreciation, and inventory, and spans everything from the sale of goods and interest to supplier payments, employee wages, and rent. 

If it’s positive:

You’ve received cash after selling goods and services, or interest has accumulated. Is there anything more positive than free money? 

If it’s negative:

You’ve paid your employees’ salary and wages, compensated your suppliers, or made income tax payments (which is code for “you followed the law”).

Cash from investing activities

Look here when: you want to know more about how your business is using cash in the long term. This includes details of any company investments, such as loans, asset purchases and sales, and payments related to a merger or acquisition. 

If it’s positive:

You’ve sold assets or investment instruments, or collected loans or insurance proceeds.

If it’s negative:

You invested in the stock market or lent money. This may be a very good thing depending on the outcome of your investment, so don’t let the negative numbers panic you! 

Cash from financing activities

Look here when: You want to see how your expected future cash flow is being used to secure the finances you need now. This includes transactions involving debt, equity, and dividends. 

If you have borrowed a portion of your expected future cash flow (plain English translation: borrowed from your future self, post-success), the details will be included in this section. This form of financing is especially useful when your business does not have many assets to draw on. 

If it’s positive:

You sold stock or made a debt issuance.

If it’s negative:

You paid out capital or cash dividends to shareholders, on reinvested in the stock market. 

Disclosure of non-cash activities

Cash flow statements prepared under the generally accepted accounting principles (GAAP) often include this section as a footnote. It includes things like the depreciation of equipment, stock-based compensation, and deferred income taxes.  

If you’ve read this far and you still aren’t feeling flutters of excitement in your chest at the thought of getting those cash flow statements into shape, guess what? 

That’s completely normal. The reality is that you don’t need a thorough understanding of all things cash flow to make your business more profitable. What you really need is the right team on your side, and we’d love to work with you! Click here to get in contact with us (you’ll be one of the first to know when our bookkeeping service launches – promise!).

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