The cash flow statement, which is also sometimes called a statement of cash flow, is a financial document that reports how much money your company is spending and how much money you have available at a given time.
The cash flow statement joins the balance sheet and the income statement as the three primary documents that reflect your company’s financial condition. The balance sheet outlines your company’s assets and debts. The income statement is an overview of incoming revenue and expenses. The cash flow statement looks at the cash that is entering and leaving your company through operations, investing and financing.
Cash flow is not the same as the net income that is reported on your balance sheet or income statement. While net income includes sales made on credit, cash flow provides a snapshot of money that has already been collected and spent by your company.
Why is a Cash Flow Statement Important?
The cash flow statement is very valuable because it shows how much actual cash your company is generating. This helps you manage day-to-day operations, and provides lenders and potential investors with insight into your company’s financial performance.
Understanding cash flow is critical to making the right decisions for your business. For example, let’s say you need to acquire a new piece of equipment to keep up with customer demands. This asset will mean an additional $500 in monthly expenses. Can you afford it? Your income statement shows a healthy net income for your company, but that includes both cash sales and sales made on credit.
The cash flow statement, however, tells you how much cash your company has on hand right now, helping you to decide how to manage the additional expense of the new equipment.
What Makes Up a Cash Flow Statement?
The statement breaks down the inflow and outflow of cash into three key areas: operations, investing and financing.
The operations component reports how much cash is being generated by your products and services. To arrive at your operational cash flow, you need to look at accounts receivable, depreciation, inventory and accounts payable. Remember—your operational cash flow should only reflect completed cash transactions, not income or spending that has been made on credit.
The cash flow from investing activities shows the amount of cash your company has spent or generated on assets like equipment, buildings or monetary investments like marketable securities.
Cash flow from financing includes changes in your company’s debt, loans or dividend payments. Cash flow is coming in from financing activities like capital investment in your company. Cash flow is outgoing when expenses like dividend and loan payments are made.
Example of a Cash Flow Statement
The information contained in a cash flow statement can vary depending on a company’s activities and industry. If you have questions on what to include in your company’s cash flow statement, it is a good idea to consult with a certified public accountant.
Click Here to See A Sample Cash Flow Statement
We also recommend using accounting software to build your cash flow statements. This reduces the chance of making an error. Below are two articles that show how to create cash flow statements using popular accounting software programs:
Sources: Investopia, Finance Train, Accounting Basics, Morningstar.com