‍Cash flow is to your business what oxygen is to your body – without it, you won’t survive. The most serious of scenarios is burning through your runway, but cash crunches are never quite out of the question. Few things are worse than realizing you aren't sitting on as much cash as you had thought, and the way you approach your cash flow statement will be critical in assessing both the history and trajectory of your business. Today we’ll walk through the fundamentals of your cash flow statement, which includes:

• What it is (and isn’t)
• A breakdown of various sections and their details
• Insights for applying the information collected

Grab a coffee, sit back, and get ready to dive into the numbers driving your business.

What is a Cash Flow Statement?

‍Besides being the most granular report of your core four financial statements, your cash flow statement reconciles your balance sheet and income statement, focusing specifically on cash transactions. The statement may not necessarily cover all business income and expenses, since a portion of your business will operate on credit, but it will tell a valuable story about the well-being of your business.

Cash transactions can come from various categories of business operations. The three core categories include operating activities, investing activities, and financing activities. When combined these categories outline whether cash flows are positive or negative over time. For reference:

1. Operating Activities are the normal business activities paid for in cash, such as buying or selling products and services. You can think of your core business operations here.
2. Investing Activities are the buying and selling of assets that produce income for your business, such as materials and equipment. You may also see these described as capital transactions.
3. Financing Activities are the cash transactions that take place between your company and its creditors, such as dividends paid out to investors and debt repayments.

What Isn’t a Cash Flow Statement?

There are a few core items that you shouldn’t be looking at your cash flow statement for, like overall profits or losses.  Accrual-based accounting has become the standard, and the reliance on accounts payable and receivable (two items that won’t be found on your cash flow statement) will impact your company’s well-being in a major way. It’s important to look at your cash flow statement to get a sense of health in a key business area, but beware of using it as a reliable metric for overall company performance.

Breaking it Down

Now that we understand the pieces that come together to form the cash flow statement, let’s dive deeper into how they’ll be organized. Your statement will consist of five main sections, all providing unique insights worth noting:

Net Income

The net income section of your cash flow statement will be transferred directly from your income statement. It’s going to be the final profit (often referred to as the bottom line) of your business once all expenses and deductions have been considered. It appears at the start of your statement because it often includes accrual-based accounts and the net income must be adjusted into net cash to represent this portion of the business properly.

Operating Cash Flow

Your operating cash flow will outline day-to-day cash transactions over time, including depreciation and credit card and bill payments. This section will be handy for small business owners, as it is the most clear view of activity and will offer insights into the oxygen flow.

Investment Cash Flow

The investment cash flow section will outline investments your business is making (funds invested out should not  be confused with the investments being made into your business in the section below). These outflows typically include growth-related items such as new equipment and acquisition of other businesses. You’ll be able to determine how much cash is being invested and whether or not your cash flow balance has remained positive. As of this point in your cash flow statement, you now understand your net cash flow from investing activities.

Finance Cash Flow

‍As mentioned above, your finance cash flow section will highlight the debt being taken on by your business. You’ll see both inflows and outflows, including instances of cash borrowed, repaid, or raised. The inflows will include bank loans and fundraising as they increase the cash balance available for spending. Outflows will consist of paying dividends to shareholders or repurchasing equity, as they decrease the cash balance available for spending. Your finance cash flow balance will outline whether or not you’ve taken on (or can take on) debt to fuel growth.

Final Cash Amount

The final cash amount is the closing section of your statement. It will summarize all of the prior categories and outline whether there has been a positive or negative cash balance change for your business. That cash balance change will then be combined with your starting balance to determine cash performance over time.

Although the final cash amount matters, what’s more important is understanding the story that leads to the final figures. With that, you’ll be able to make much better decisions regarding the future of your business.

Informing Decisions

Like your balance sheet and income statement, your cash flow statement will paint a vivid picture of how your business is performing and offer insights into how it can prepare for future success. Remember that unlike the other two statements, a negative number doesn’t necessarily mean something is wrong. A healthy business with a reasonable amount invested in new sources of income and future growth can have a negative cash flow balance and thrive. So long as you’re aware of the investments being made, the exposure they assume, and the potential risks involved, there’s little reason to be concerned.

In addition to that, you also shouldn’t assume a positive cash flow balance to be optimal. This can indicate that you’ve temporarily inflated balances with capital that will need to be repaid or that you’re not investing enough into the future of the business. If you happen to have monster margins and a mountain of free cash flow, feel free to keep operating as you have been, of course. Ultimately, you should understand where you are at, where you want to go, and how your cash balance can help you get there.

As a final note, we'll touch on startups. For most startups, operating income will be a negative cash flow. In the early days you can typically expect to spend more money than you take in, which is where your burn rate and runway come in. Keeping an eye on this portion of your cash flow statement will allow you to determine how quickly you're using the cash available and whether or not the remainder will be enough to cover future obligations. If current and expected cash amounts seem off, it'll be best to assess why and correct course before disaster strikes.

Applying insights from your cash flow statement correctly can be challenging for businesses of any size. If you’re looking for support from a team invested in your success, contact ParallelCFO today!