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Cash flow statements are financial statements that show the cash in and cash out for a given company. And though this may sound quite simple, there are many confusing parts in this common business paperwork. Cash flow statements, or CFS, measure how well a business is able to generate cash, as well as how much more they are making (cash in) than they are using (cash out).
The statements are meant to show how a business is able to pay its debts and fund its operating costs and are an important supplementary document to a balance sheet and income statement. In addition, a business’ cash flow statement is a mandatory part of a business’s financial report. Let’s go over cash flow 101 and exactly how to interpret statements!
Cash Flow statements 101.
One use of your cash flow statement is to give investors a simple way to understand how your business is running, where your money is coming from, and where your money is going. The second use of your statement is for creditors, who use your CFS to determine how much cash your company has to fund its needs and pay its debts.
This means your cash flow statement is used by both investors and creditors to judge the financial footing and viability of your business.
Cash flow statements show:
- How a business manages its cash or cash equivalents
- How a business generates its cash or cash equivalents
- How a business spends its cash or cash equivalents
Components of cash flow statements.
Cash from operating activities
The operating activities on your statement reflect how much cash is directly generated from your products or services. This means accounts receivable, depreciation, inventory, and accounts payable are reflected in your operating activities section as well.
Cash from investing activities
Investing activities include all sources and uses of cash from your business’s investments, such as the purchase or sale of an asset, loans made to vendors, received from customers or payments related to a merger or acquisition.
Cash from financing activities
Cash from financing activities may include sources of cash from investors, loan companies, or banks. Dividend payments, stock repurchases, and the repayment of loans are all included in this category. These changes can be cash in when you receive financing, and cash out when you make loan payments.
Cash flow statements vs. balance sheets.
Your cash flow statement is distinct from your income statement or balance sheet because it never includes your future incoming or outgoing cash on credit. It is important to remember that cash is not the same as your business’s net income, which includes cash sales and sales made on credit.
A cash flow statement measures your business’s strength, profitability, and the potential long-term future for your company – so it is not just important, but vital to understand! Your CFS can help determine whether your company has enough money to pay its expenses and, ultimately, stay in business. In addition, your company can use your statement to predict future cash flow and create an accurate and viable budget.
By studying and understanding your own cash flow statement, you (or a creditor or investor) can get a clear picture of how much cash your business generates and get a better understanding of your financial strength for the future.
This Probably Funding blog post is purely educational and features general information and opinions. Nothing contained herein is intended to constitute advice or recommendations and should not be treated as such.