Cash Flow Statement

Back to Basics: Cash Flow Statement

A cash flow statement shows you and your investors how much cash comes in to and goes out of your business over a specified period, usually either a quarter or a year.

You can use your cash flow statement to help you budget by predicting future cash flow.

Investors can use your cash flow statements to see how much actual cash you’ve generated and to determine whether you’ll be able to pay for your business’s operations and growth activities. Generally, if you have a net positive cash flow, you have cash available to grow your business.

However, having a net negative cash flow should not automatically raise red flags. You may have a negative cash flow because you decided to expand your business, which will be better for the company in the long run. Investors will need to analyze your cash flow statements from one period to the next to get a clearer picture of how your company is performing and to determine whether your company is on the brink of bankruptcy or success.

Your cash flow statement is derived from your balance sheet and income statement. You’ll need the net earnings from your income statement. Your net cash flow from one year to the next should be equal to the increase or decrease of cash between two consecutive balance sheets covering the same period.

Your cash flow statement looks at three types of activities: operating, financing, and investing. Operating and financing show how your company gains cash. Investing shows how your company spends its cash.

Cash Flow Statement

Cash Flow from Operations

Cash flow from operating activities evaluates your net income and losses. It shows how much cash comes from sales of your products or services. It also shows what cash has been spent to make and sell your products or services.

Investors tend to prefer companies with a net positive cash flow from operating activities.

Cash Flow from Investing

Cash flow from investing activities reflects cash you’ve spent on capital expenditures, such as equipment. It also shows any acquisitions of other businesses and monetary investments.

Cash Flow from Financing

Cash flow from financing reflects your outside financing activities, such as selling stock or by taking a bank loan. Paying back a bank loan or making dividend payments will also be shown under financing activities.