Cash Flow Statement Analysis: How to Read and Understand Your Cash Flow Statement

In the cash flow interpretation, the accrual accounting counts income when it’s earned, not when the cash hits the bank. So if you invoiced a client last month but haven’t been paid yet, your income statement says you made money, but your bank account says otherwise. The purpose of a statement of cash flows is to detail incoming and outgoing cash flows for a specific reporting period, categorized according to operating, investing, and financing activities.

Cash Flows From Operations

Even though our net income listed at the top of the cash flow statement (and taken from our income statement) was $60,000, we only received $42,500. These three activities sections of the statement of cash flows designate the different ways cash can enter and leave your business. A cash flow statement is a regular financial statement telling you how much cash you have on hand for a specific period. Let’s take a closer look at what cash flow statements do for your business, and why they’re so important. Then, we’ll walk through an example cash flow statement, and show you how to create your own using a template. This breakdown of cash flows allows companies to make informed decisions based on their financial position and ensures transparency in financial reporting.

• Moreover, financing cash flow reveals how a company raises and repays capital, with excessive debt issuance posing risks but steady dividend payments suggesting financial stability.
• Accurate cash flow calculation is crucial for understanding how much cash a business generates and whether it has enough money to cover its expenses and obligations.
• Since the income statement and balance sheet are based on accrual accounting, those financials don’t directly measure what happens to cash over a period.

Financing Activities

With our designated bookkeepers and accountants, you get accurate financial reporting and accurate tracking of your income and expenses even if cash hasn’t changed hands. As a small business owner, you’re juggling countless responsibilities, and creating and analyzing financial statements requires time and expertise that you might not have. That’s because the complexity of financial management often demands more than a DIY approach; it requires professional knowledge and experience to ensure accuracy and compliance. Even within a company, different departments might use the cash flow statement in different ways.

Cash From Investing Activities: What Does It Mean?

For instance, it can show if the company is growing fast, making a lot of money, or if it’s having some troubles. But if it’s steady and positive, they might see it as a good opportunity to grow their money. In simple terms, changes in equipment, assets, or investments are part of cash from investing, using available cash, not borrowed money.

Key Ratios and Indicators

Nothing will appear there in July, and then in August, you start paying back in equal installments that appear as negative numbers. If the number here is positive, you have received new bills during the month that you need to pay but you haven’t paid yet. If the number is negative, you have paid down more bills than you received during the month.

Indirect method

When these financial statements are analyzed together they provide a full picture how to read andunderstand a cash flow statement of your business’s finances. Greg purchased $5,000 of equipment during this accounting period, so he spent $5,000 of cash on investing activities. Since we received proceeds from the loan, we record it as a $7,500 increase to cash on hand. This section covers revenue earned or assets spent on Financing Activities. When you pay off part of your loan or line of credit, money leaves your bank accounts. When you tap your line of credit, get a loan, or bring on a new investor, you receive cash in your accounts.

How to Read a Cash Flow Statement for Your Small Business

You can also use your cash flow statement to track and measure the results of your cash flow management activities, and to identify the areas that need improvement or attention. Your cash flow statement can also help you to communicate your cash flow situation to your stakeholders, such as your investors, lenders, or employees, and to gain their trust and confidence. Cash flow from operating activities shows all the cash the company generated/lost from doing its core business activities which is selling its products and/or services.

To fully understand your startup’s financial position, always analyze it in conjunction with other financial statements and key performance indicators. Unlike the P&L Statement, which measures revenue and expenses, the cash flow statement focuses on the actual movement of cash and cash equivalents. This distinction is crucial because a company can be profitable on paper but still face cash flow issues if revenue is not collected timely or expenses are paid too quickly. Buying equipment, investing in new tools, and acquiring startups, are all signs they are planting seeds for the future. Spending on growth is not bad, if the core business is strong enough to support it.

• This snapshot helps illustrate how cash moves in and out across operating, investing and financing activities.
• They explain the sources and uses of cash reflected in the other two statements.
• Analysts use the CFF section to determine how much money the company pays out via dividends or share buybacks.
• A positive cash flow from financing means that the company received more cash from issuing debt or equity than it paid to repay debt or repurchase shares.

We will also provide some tips and best practices to overcome these challenges and make better decisions based on cash flow information. We can also analyze the quality of the operating cash flow by looking at the factors that contributed to it. In this case, we can see that the operating cash flow was higher than the net income, which is a positive sign. Moreover, we can see that the operating cash flow was affected by the changes in working capital, which could be due to the business cycle, the seasonality, or the working capital management.

Before we dive into the cash flow statement, I want to share the accounting differences between cash flow and other financial statements in the 10-K report. Any dividends paid are recorded under financing activities within your cash flow statement. If you aren’t tracking your cash flow or still don’t feel sure where to start, try signing up for LivePlan. While income statements are excellent for showing you how much money you’ve spent and earned, they don’t necessarily tell you how much cash you have on hand for a specific period of time. Learn how to build, read, and use financial statements for your business so you can make more informed decisions.