A closer look at cash flow statements

As a business, understanding what money you have available and how it’s being spent is key. Not only is it essential to forecasting your operations, it matters to external stakeholders as well. Investors and creditors need to know how you’re spending your capital. 

While investors look at your business’s financial standing to determine investment attractiveness, creditors need to know about liquidity and net cash flow. All these elements are essential to any business, no matter its size.

business professionals sitting at a desk talking

What is a cash flow statement?

Internally, understanding cash flow helps businesses better manage cash and determine where resources should go. And with a process in place to automate your financial statements, it becomes even easier to gain helpful insights.

A cash flow statement is an important financial tool showcasing the amount of cash and cash equivalents available to a business. The statement of cash flows can be monthly, quarterly, or yearly. It basically answers the question, “How well is your business managing its cash?

As part of the financial power trio, along with the balance sheet and income statement, the cash flow statement helps establish a clear picture of your company’s cash flow.

3 types of cash flows

The cash flow statement reveals positive cash flow and negative cash flow—in other words, the operating cash flow for a specified accounting period.
But to better understand cash flow statements, let’s take a closer look at its three key components: operating activities, investing activities, and financing activities.

1. Operating activities

This part of the cash flow statement represents how much cash is generated. Interest payments, salaries, rent payments, inventory transactions, and tax payments are all included. Investments, dividends, and debts are not part of this section.

2. Investing activities

Investing activities include cash flow from selling or purchasing different long-term assets including physical property (think real estate) or non-physical items (think patents).

3. Financing activities

The cash flow statement also details the extent of cash flow coming from debt and equity. Financing activities include issuing or paying down debt, paying cash dividends, and issuing or selling stock.

Example of a cash flow statement

Now that you know what a cash flow statement is, let’s take a look at a cash flow statement example.

cash flow statement example

As you can see, a cash flow statement includes sections for operating, investing, and financing activities. The way it’s organized, you can see net cash flow for each type of activity, as well as the total end-of-period amount. At the end, you’ll have a concrete view into both the cash you have on hand for the end of the statement’s period as well as an overview of cash flow activities for that timeframe.

And by comparing your cash flow statements over time, you can see how well your business manages its cash position. This gives you another window into your financial performance, in addition to what you learn from your income statement and other important financial statements.

Calculating cash flow

There are two different methods you can use to calculate cash flow: the direct method, and the indirect method.

Cash flow statement direct method

The direct method calculation considers all cash collections coming from operating, investing, or financing activities and minuses the cash disbursements.
To calculate cash flows with the direct method, you need to count all cash available and subtract it from cash payments.

Cash flow statement indirect method

The other way to calculate cash flow involves the accrual accounting method. With this method, the accountant records the generated revenue and expenses at a time that’s different from the date of actual payment.

Compared to the direct method, the indirect method does not employ transactional data. It starts with net income coming from the income statement. It then adds adjustments as necessary to the accruals.

When you create your cash flow statement and calculate your cash inflows and cash outflows, you can also create a cash flow budget. This type of budget will help you understand available cash. It’s a practical tool to use with other budgeting methods that focus on profit only.

How to use a cash flow statement

A business that wants to be successful should have available cash, so your cash flow statement says a lot about how well your business is performing and how successful it will be.

A positive cash flow indicates a company is generating more money than it’s spending. A negative cash flow, on the other hand, means you are spending more cash than you are receiving.

You can use a cash flow statement to gain insights to help with internal budgeting decisions and hiring decisions. It shows what you can and cannot afford and reveals changes in your assets, liabilities, and equities.

Another use is projecting what will happen in the future because you can use your cash flow statements to predict future cash flows.

Investors and lenders look at the cash flow to determine if the company is risky—so having positive cash flow can make your business more attractive to these stakeholders, which, in turn, is essential for business growth.

How cash flow statements can help your business thrive

Here’s the thing: there is no business if there is no cash flow (otherwise known as bankruptcy).

With the cash flow statement, you gain a better understanding of how and when to pay back loans, purchase commodities, or even invest in becoming more profitable as a business. This allows you to avoid slipping into negative financial territory where you can’t service your debts.

Here are some of the other advantages of a cash flow statement:

  • Gain deep insights into spending habits: With cash flow statements, you quickly understand what principal payments you need to make to creditors. You also see the cash flow for inventory items that otherwise are not noted in other financial statements.
  • Maintain a cash balance: Having cash sitting around is not ideal for any business. But also, insufficient cash to cover expenses is not recommended. You can invest that cash generated for profitable returns in the first case. And in the second case, you can get loans to keep your business going.
  • Plan better: Better financial planning, better financial outcomes. A successful business typically has liquid cash to pay off debts, such as short-term liabilities with future payments. And with the use of your past cash history, you can analyze past transactional data to make better decisions in paying off debts or decide to request more financing, if necessary.
  • Generate cash: You can only increase profit for your company if you continue to generate cash. As an example, paying less for equipment is actually a way to generate cash. And the quicker you can generate cash, the more impactful it is on the bottom line.Ultimately, as you learn to work with your cash flow statement, you’ll gain more control over your finances and discover more efficient ways to use your financial resources for low-risk growth.

Keep your business essentials in plain view

Done right, a cash flow statement provides valuable insights for different stakeholders. Whether that’s looking into a business’s operations, various sources of cash, or ways it is spent for ongoing operations, cash flow statements cover it all.
Of course, automating the expense management process can help you amplify the impact of cash flow statements, allowing you to better navigate your financial goals and make smarter business decisions.

Whether you’re trying to figure out how much cash you have available or where it’s mainly being spent, you are in the know at all times with Divvy’s expense and spend management software. Sign up for a free demo to see it for yourself.

The information provided on this page does not, and is not intended to constitute legal or financial advice and is for general informational purposes only. The content is provided “as-is”; no representations are made that the content is error free.