Understanding cash flow statements

A cash flow statement shows how much cash is moving in and out of your business over a certain period of time. You need to have sufficient cash available to pay your debts and purchase materials and assets, so a cash flow statement is where you go to check you will not face any issues in this area.

There are normally 3 sections in a cash flow statement, relating to different areas of your business:

• cash flow resulting from core operations
• cash flow resulting from financing
• cash flow resulting from investment.

Cash flow resulting from operations

This section contains the main cash-generating activities of your business. Generally, any money earned or spent in the normal day-to-day running of your business will appear in the operations section of the cash flow forecast.

The largest figure in this section should be the net income generated by sales of the goods or services you produce.

Accounts receivable (money owed to you) and accounts payable (money you owe) will also appear in this section. If you spot that accounts receivable are increasing at a faster rate than income from sales, you may have an issue with your business collecting its debts.

Another positive figure in the operations section can be the cash reclaimed from the depreciation of assets, while a negative figure will appear in the form of the taxes you pay, and another as wages to employees.

Cash flow resulting from financing

This section measures the flow of cash between your business and its owners and creditors.

Cash income in this section can include:

• any funds borrowed
• public issues of shares or bonds.

Cash expenditure in this section can include:

• loan repayments
• dividends paid out
• repurchase of shares or bonds.

Cash flow resulting from investment

Investing activities listed in this section generally include purchases or sales of long-term assets, such as property, plant and equipment. The sale or purchase of investment securities would also be included here.

How to interpret changes in cash flow

Depending on the size and complexity of your business, your cash flow statement may include a few or many items. The crucial figure, found at the bottom of the document, is the net increase or decrease in cash in the business since the previous statement.

An increase in cash reserves indicates your business is healthy and heading in the right direction. If reserves stay broadly the same this only suggests problems if the figure is low. If your cash reserves are decreasing you may find it increasingly difficult to pay your debts, and find yourself relying more heavily on credit. You should take immediate action to rectify whatever is causing your cash reserves to fall.

Related links

• Learn more about monitoring your financial performance.
• Read about using electronic and manual record keeping to generate financial forecasts and reports.
• Consider working with a business adviser to set up or interpret cash flow reports.
• Learn more about managing debtors.