The cash flow statement is one of your most important financial tools. Through this, you see exactly where cash came from and where it went. You’ll be able to tell if you’re running out of cash (which can be the case even if you’re making a profit), how much your loan payments are affecting your bank account and whether or not too much money is being taken out of the business.
An easy trick to understanding a statement of cash flows is to simply imagine that you are your bank account. The statement should be used as a diagram to shoe you where money was gained and where it was lost. It should tell you exactly what was in the account at the beginning of the month, year or any other period and where it currently sits.
The statement is split into three sections. The last two, Cash Flows from Investing Activities, and Cash Flows from Financing Activities are pretty much what you’d think they’d be, based on the title. Investing Activities relate to things that the business owns and financing activities are either loans that were taken out or loans that were given to another business venture. If the number is negative, it means you either sold stuff (investing) or received a new loan (financing). It’s similar to how deposits and withdrawals work on a personal account.
Now the first section, Cash from Operating Activities is a little more difficult to follow. This section has to do with your actual product line or services. On the first line, you might see depreciation or amortization. This was taken out in your expenses on the P&L (Income Statement) but since it isn’t cash, it gets added back in here.
Accounts Receivable and Inventory are important parts of your business, but the bigger they get, the more money you’re still waiting to receive. For instance, if you suddenly have 30 widgets in stock when you normally only have 20 on hand, the difference is subtracted. However, if your receivables get smaller – because more people paid you, or you are done to 10 widgets in your warehouse, you’d have more cash and so would add it back in the decrease.
Accounts Payable is just the opposite. If you haven’t yet paid the bills, you still have the money. Therefore, the bigger your payables get, the more cash you have, and the difference is added back in. If you pay down your payables, you now have less cash than before and so subtract it.
Once you understand the cash flow statement, you’re much closer in understanding just where the profit is in your company.
For more information on this or to speak with one of Certified Public Accountants, contact our offices in Joplin, MO today.