Understanding Your Cash Flow Statement

Understanding Your Cash Flow Statement

For many business owners, interpreting their company’s cash flow statement is a confusing process. What the majority of these entrepreneurs don’t realize is that it does not have to be. What exactly is your cash flow statement and how does it differ from your business’ other financial reports?

Unlike your company’s balance sheet which represents a snapshot of your business’ finances at any given point in time, the cash flow statement discloses both income and expenditures for a designated period of time.

The cash flow statement is broken down into three separate sections: cash flow from operations, cash flow from investing and cash flow from financing. By understanding these different areas and how they affect your business, you will quickly find out that analyzing your cash flow statement is not too difficult of a task after all.

Cash Flow From Operations

The first section of your cash flow statement documents your cash flow from operations. This is the meat and potatoes of your company, and this section of the cash flow statement is commonly the most complex. The items under this category are the results of your primary business focus. Here you will see the costs and income associated with the goods or services that your company sells or provides.

There are two types of ways to list cash flow from operations: the direct method and the indirect method. While the direct method lists specific transaction types and how they have impacted your cash flow (such as cash payments made to a vendor), the more common indirect method utilizes line items from your balance sheet to determine the positive or negative changes seen over the period represented in your cash flow statement.

Cash Flow From Investing

Under cash flow from investing you will find the costs and gains associated with transactions that do not fit within the range of your company’s standard business functions. Most frequently, the items found under cash flow from investing include the purchase and sale of property and equipment. If your business purchases office space, for example, you will find a negative balance under cash flow from investing for the amount paid to acquire the building.

Cash Flow From Financing

The third section of your cash flow statement, cash flow from financing, lists debt transactions such as the funds received from taking out a loan, as well as equity events like funds being paid out to business owners. One important thing to note is that the payment of interest on long-term debt is not categorized under cash flow from financing, but instead as a part of cash flow from operations.Too frequently, entrepreneurs run into trouble with their businesses because they simply don’t understand their financial statements. While the other common documents may be a little bit more straightforward and easy to comprehend, the cash flow statement can pose a challenge for some business owners. In reality, understanding your company’s cash flow statement is a breeze once you get the hang of it and can mean the difference between seeing steady, long-term growth and unanticipated financial threats.

The best way to manage your cash flow is to encourage anyone who owes you money to pay it as quickly as possible while delaying paying anyone you owe money to as long as reasonably possible. The key to note is within a ‘reasonable’ timeframe. You don’t want to keep your creditors or employees waiting too long or incur interest or late charges.

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