Understanding your company’s cash flow statement is indispensable to getting your company finances in order. It tells you how much money goes in and out of your business. Your company’s cash flow statement, the balance sheet and the income statement together will give you a holistic view of your company’s financial profile.

Understanding your cash flow statement

A cash flow statement is a report of sorts that tells you how much money your company has in hand or its liquidity.

Operations Costs + Asset Investments + Financing = Available Cash

Let’s break down each element of a cash flow statement to understand it better.

Operations Costs: Operations costs or Operating Cash Flow shows the amount of money spent or made by your business on a day-to-day basis.

Operations costs = Income + Collections of sales previously made on credit – Regular expenses

This value gives you the most accurate assessment of the amount of money your company generated from its core business. As a small business owner, you need to focus on this total net cash and work towards continuously growing this number.

Asset investments: Also known as Cash Flow from Investing Activities, asset investments refers to the money used to sell or purchase long-term capital assets for the company. For example, Equipment, property, machinery, vehicles, furnishings and investment securities.

Businesses should ideally aim at being able to pay for these investments with the income it makes from its operations.

Financing: This section of a cash flow statement gives details about money received from or paid to lenders, creditors or investors. In the case of publicly traded companies, this section is where the cash flow from the sale of stocks and bonds, payment of dividends, or repayment of debt capital is mentioned.

Now that you have a fair understanding of the main heads of a cash flow statement, we’ll define some of the common terms found in a statement that you need to be aware of.

Common terms seen in cash flow statements

Accounts receivable (A/R): The money your business is yet to receive from customers for goods and services that they purchased on credit.

Accounts payable (A/P): The amount you need to pay creditors for purchasing goods and other operational equipment.

Current assets: Refers to all your inventory, cash, work in progress, and receivables that will last or be used within a year.

Depreciation expense: The expense incurred when an asset stops contributing to the profit of your business

Inventories: Your business’s current inventory amount.

Long-term debt: Debts that are due for payment in a year or later.

Net cash balance: Total cash deposited – Cash disbursements

Net income: In simple terms, Total revenue – Business costs = Net income

Other current liabilities: Any debt that is not covered under common liabilities

Short-term notes payable: Debt due in a short time period, usually in less than a year.

Once you’ve read this, you could also look at some of the cash flow statements available on the internet to gain an understanding of how it works. This will help you understand your business’s cash flow statement effortlessly. We hope this article will help you manage your company’s finances better!