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 (i.e. it reflects your 'liquidity').

Having enough cash available to pay your debts and to buy materials and assets is an important part of business planning. A cash flow statement will quickly tell you if you are likely to have any issues in this area.

Read more about managing cash flow.

What's in a cash flow statement?

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

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

Cash flow from operations

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

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 accounts receivable are increasing at a faster rate than income from sales, you may have a problem managing your debtors.

Cash flow 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
  • re-purchased shares or bonds.

Cash flow 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 read a cash flow statement

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 statement, is your net cash flow.

You can compare this figure with the net cash flow from your previous statement. An increase in cash reserves indicates your business is healthy and heading in the right direction. If cash reserves stay roughly the same, there may only be 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 resolve whatever issue is causing your cash shortfalls.

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Last reviewed
May 22, 2014

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