How to Read a Cash Flow Statement

How much money does your company have available right now? That’s a question your cash flow statement can answer.

As its name suggests, a cash flow statement charts the flow of money into and out of your business. It’s all about gauging liquidity — or cash on hand — so that you can make smart decisions about paying bills and buying additional assets or inventory.

When viewed with your company’s income statement (a report of sales and expenses during a specific time period) and balance sheet (a summary of the net worth of your company on a given day), your cash flow statement gives you a complete view of your company’s financial profile. (Publicly traded companies are required to disclose all three statements to the SEC each quarter.)

Let’s break down a typical small-business cash flow statement and review each of its sections. Print or view this sample statement [PDF] to follow along.

What the cash flow statement tells you is simple: Operations Costs + Asset Investments + Financing = Cash on Hand

Operations costs: Also called operating cash flow, operations costs show how much you have spent or made on a daily basis. This includes cash that came in for the period and collections of sales previously made on credit, minus assorted regular expenses. It is the most accurate assessment of how much money you have generated from your core business. Total net cash is a number you want to see growing.

Asset investments: This section, also called cash flow from investing activities, shows the cash used to sell or buy long-term capital assets for your business. These assets may be equipment, property, machinery, vehicles, furnishings, or investment securities. Over time, you want to see that the business can pay for these investments with income from its operations.

Financing: Here you’ll find the cash received from or paid to lenders, other creditors, and investors (if you have them). For publicly traded companies, this is where cash flow from the sale of stocks and bonds, payment of dividends, or repayment of debt capital is reported.

Here are some common terms found in a simple cash flow statement and their definitions:

  • Accounts receivable (A/R): The amount your business is owed by customers for goods and services that they purchased on credit.
  • Accounts payable (A/P): The amount you owe creditors for purchasing goods and other operational equipment.
  • Current assets: All of your inventory, cash, work in progress, and receivables that will last or be used within a year.
  • Depreciation expense: When an asset has stopped contributing to the profit of your business and becomes an expense.
  • Inventories: The amount of your business’s current inventory.
  • Long-term debt: Debts that are due after a year or more.
  • Net cash balance: The total amount of cash deposited, minus any cash disbursements.
  • Net income: The amount remaining after you subtract all of your business costs from your total revenue.
  • Other current liabilities: A grouping of debts that are not covered under common liabilities, such as accounts payable.
  • Short-term notes payable: Debt that must be paid off in a short amount of time, usually in less than a year.

About Kristin Ewald

Kristin Ewald, a former Time Inc. editor based in California, has written frequently for the SMB audience. She is also a small business owner who helps companies write and produce user-friendly websites.
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4 comments
GrowthForce
GrowthForce

The accounts payable and accounts receivable information alone is a huge resource for business owners. If the numbers are not what you are expecting, check your processes. Are clients not paying right on time? Provide incentives for paying early or late fees for paying late. Or work with your suppliers to create a better payment plan to improve your accounts payable.

Ben Van Zee
Ben Van Zee

Yes! Many businesses don't realize that it's not usually profitability, but a lack of cash flow that cause small businesses to fail!

 

Being able to properly read a cash flow statement is paramount to succeeding in business.

 

Thanks for the post, Kristin.

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  1. [...] is a great article by an Intuit writer (makers of QuickBooks):How to Read a Cash Flow Statement by Kristin Ewald on July 5, 2013How much money does your company have available right now? That’s a question your [...]

  2. [...] If you know in advance that you may be short of cash, you can prepare. You could look for additional bank financing or try to modify the repayment terms on loans or other debts. But to do any of that, you have to be able to predict your cash flow.  [...]