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A Cash Flow Statement is a financial report that shows how cash enters and leaves a business over a specific period—usually monthly, quarterly, or annually. It tracks actual cash, not accounting profits, and helps you understand whether your business has enough cash to meet its obligations.
While your profit and loss statement shows whether your business is profitable, the cash flow statement shows whether you have the cash to pay your bills, salaries, loans, and other expenses.
Why Should a Business Owner Review It Periodically?
Reviewing the cash flow statement regularly helps you:
- Ensure Liquidity
You might be profitable on paper but still run into trouble if your cash inflow is slower than outflows. This statement shows if you have enough cash to operate daily. - Make Better Decisions
Understanding where your cash is coming from and where it’s going helps you make informed decisions—like whether you can afford to hire staff, invest in equipment, or need to delay a purchase. - Spot Cash Shortages Early
A negative cash flow trend may indicate issues like slow-paying customers or rising expenses. Catching this early lets you take corrective actions (e.g., tightening credit terms, cutting costs, or arranging a loan). - Strengthen Financial Planning
Reviewing past cash flow trends helps forecast future cash needs, helping you plan for seasonal dips or upcoming capital expenditures. - Support Loan Applications
Banks and investors often review your cash flow statement to assess the financial health and repayment ability of your business.
Components of a Cash Flow Statement
A cash flow statement is typically divided into three main sections:
1. Operating Activities
This section shows the cash generated or used by the core business operations:
- Cash received from customers
- Cash paid to suppliers and employees
- Interest and taxes paid
Positive cash flow here indicates that the business is generating enough cash from its day-to-day operations.
2. Investing Activities
This section reflects cash used to buy or sell long-term assets such as:
- Purchase/sale of equipment, property, or vehicles
- Investment in other businesses
- Loans made to others
Negative cash flow here isn’t necessarily bad—it often means the business is investing for growth.
3. Financing Activities
This shows cash flows related to funding the business:
- Proceeds from loans or equity financing
- Loan repayments
- Owner’s capital injections or withdrawals
- Dividends paid
This section helps you see how the business is funded and whether it’s relying more on internal cash or external financing.
Summary
In simple terms, the cash flow statement answers the question: “Where did the money go?” For small business owners, it’s a critical tool for avoiding cash shortages, planning ahead, and ensuring the business remains financially healthy.
Key cash flow ratios
Automatic Reports, Smarter Decisions
You don’t need to worry about how to prepare cash flow statements—our solution does that for you automatically.
All you need is a clear understanding of what the numbers mean, so you can make confident decisions to manage and grow your business effectively.