A cash flow statement is a financial report that shows how cash moves in and out of a business over a specific period, typically monthly, quarterly, or annually. It provides insight into a company’s liquidity by detailing cash inflows and outflows from three main activities: operating, investing, and financing
How Cash Flow Statements Work
- Operating Activities
This section reflects cash generated or used by the company’s core business operations. It includes cash received from customers, cash paid to suppliers and employees, interest payments, and taxes. It adjusts net income for non- cash items like depreciation and changes in working capital (e.g., accounts receivable and payable)
- Investing Activities
This part shows cash used for or generated from long-term investments such as buying or selling property, equipment, or securities. Negative cash flow here often means the company is investing in growth, while positive cash flow may come from asset sales
- Financing Activities
This section records cash flows related to borrowing, repaying debt, issuing or buying back stock, and paying dividends. It shows how the company finances its operations and growth through external sources
The statement reconciles these three sections to show the net change in cash for the period and the ending cash balance, which should match the cash reported on the balance sheet
What Cash Flow Statements Show You
- The actual cash available to the business, distinct from accounting profits or net income.
- Whether the company generates enough cash from operations to sustain itself.
- How much cash is being invested in long-term assets.
- How the company is financing its activities through debt or equity.
- Potential liquidity issues or financial distress if cash flow trends downward
Example of Using a Cash Flow Statement to Adjust a Budget
Suppose your cash flow statement for the current month shows:
- Operating cash inflows of $50,000 from sales.
- Investing cash outflows of $20,000 for new equipment.
- Financing cash inflows of $10,000 from a loan.
Your net cash flow is $40,000, but your cash balance only increased by $10,000 because you had to cover some payables from previous months. Based on this, you might adjust your budget for the next month by:
- Reducing discretionary spending to maintain a positive cash balance.
- Delaying further equipment purchases to conserve cash.
- Planning to increase sales or collect receivables faster to improve operating cash flow.
- Considering financing options if cash flow from operations is insufficient to meet obligations
By regularly reviewing your cash flow statement, you can make informed decisions to ensure you have enough cash to cover expenses, avoid overdrafts, and invest wisely. In summary, a cash flow statement tracks the real cash movements in a business, helping you understand liquidity, manage spending, and plan budgets effectively. It is an essential tool for financial health monitoring and strategic planning
