Understanding Your Cash Flow Statement

Understanding Your Cash Flow Statement

For many business owners, interpreting their company’s cash flow statement is a confusing process. What the majority of these entrepreneurs don’t realize is that it does not have to be. What exactly is your cash flow statement and how does it differ from your business’ other financial reports?

Unlike your company’s balance sheet which represents a snapshot of your business’ finances at any given point in time, the cash flow statement discloses both income and expenditures for a designated period of time.

The cash flow statement is broken down into three separate sections: cash flow from operations, cash flow from investing and cash flow from financing. By understanding these different areas and how they affect your business, you will quickly find out that analyzing your cash flow statement is not too difficult of a task after all.

Cash Flow From Operations

The first section of your cash flow statement documents your cash flow from operations. This is the meat and potatoes of your company, and this section of the cash flow statement is commonly the most complex. The items under this category are the results of your primary business focus. Here you will see the costs and income associated with the goods or services that your company sells or provides.

There are two types of ways to list cash flow from operations: the direct method and the indirect method. While the direct method lists specific transaction types and how they have impacted your cash flow (such as cash payments made to a vendor), the more common indirect method utilizes line items from your balance sheet to determine the positive or negative changes seen over the period represented in your cash flow statement.

Cash Flow From Investing

Under cash flow from investing you will find the costs and gains associated with transactions that do not fit within the range of your company’s standard business functions. Most frequently, the items found under cash flow from investing include the purchase and sale of property and equipment. If your business purchases office space, for example, you will find a negative balance under cash flow from investing for the amount paid to acquire the building.

Cash Flow From Financing

The third section of your cash flow statement, cash flow from financing, lists debt transactions such as the funds received from taking out a loan, as well as equity events like funds being paid out to business owners. One important thing to note is that the payment of interest on long-term debt is not categorized under cash flow from financing, but instead as a part of cash flow from operations.
Too frequently, entrepreneurs run into trouble with their businesses because they simply don’t understand their financial statements. While the other common documents may be a little bit more straightforward and easy to comprehend, the cash flow statement can pose a challenge for some business owners. In reality, understanding your company’s cash flow statement is a breeze once you get the hang of it and can mean the difference between seeing steady, long-term growth and unanticipated financial threats.

The best way to manage your cash flow is to encourage anyone who owes you money to pay it as quickly as possible while delaying paying anyone you owe money to as long as reasonably possible. The key to note is within a ‘reasonable’ timeframe. You don’t want to keep your creditors or employees waiting too long or incur interest or late charges.

November 7 – 10, 2013 Breaking Free Live Experience, Hollywood, FL. I am once again pleased to be a Master Class Sponsor for David Neagle’s event. If you’re going to the event, please stop by my booth to say “Hi”. I am scheduling client appointments while I am there. If you know you want to chat about how we can help you with your business, schedule time now. There is limited time available so it would be a good idea to book now.

November 20, 2013 1:00 pm EST / 11:00 am PST Are You Ready for 2014? Map Out Your Year Now. It’s all a matter of planning. But there’s a difference between planning and reacting. Without knowing the right ingredients to include in a steadfast plan, the line between achieving goals and “flying by the seat of your pants” is blurred. Set your business up so decisions are easy, cash flow is steady and your stress level is decreased. Take a moment to think of yourself relaxed, only working the hours you want to work, able to take a vacation or atleast weekends off! Yes this can be your reality! With a clear plan, you will achieve all of your goals and know which roads to take to ensure your business grows. Register here for this free workshop!

December 4, 2013 Become a Relaxed Entrepreneur, Palm Springs, CA. Registration is now open to learn how to set up your business so you can get out of overwhelm. If you haven’t been able to schedule a vacation in over a year, you need to attend this event. Get focused, individualized attention in a group setting. Make a conscious decision to design your business so it supports the life you dream of ~ travel, money, purpose. It is within your reach. Click here to register.

If you no longer wish to receive our emails, click the link below:
Unsubscribe