How Can My Statement of Cash Flows Transform My Business?

Chris Roush | February 28th, 2014

Do you realize that your business’s financial statements are a valuable management tool for decision making? You may be thinking, “Well, I just get them done because the bank needs them for my loan file,” or, “I think I have a copy in a drawer somewhere.” But if you take the time to understand your financial statements, you’ll be surprised to find that they can give you information on the condition of your company and allow you to make better business decisions. 

Statement of Cash Flows

Typically, the balance sheet and the income statement get all the attention and glory, and don’t get me wrong they are very useful. But there’s an underappreciated statement further back in your stack of financial reports that you may find useful.

Have you ever asked yourself or your financial advisor, “If we have a profit, then why don’t we have any cash?” If you have, then the statement of cash flows is for you! This statement shows where cash came from and where it went for the year and is divided into three sections.

Three Sections of Cash Flows

  1. Cash flows from operating activities. This begins with net income from the income statement and reconciles that to cash provided by or used in operating activities. A big item in this section is depreciation, since it’s an expense in the income statement, but it’s not cash paid out in the current year. Other factors in operating activities are increases and decreases in accounts receivable, inventory and accounts payable. If you have built up inventory, profits may be up, but the cash is tied up in that excess inventory. Likewise if there are more receivables that are taking longer to collect, then that cash hasn’t come in yet.
  2. Cash flows from investing activities. This section primarily shows cash spent from investing in new equipment or other assets and any cash received from selling off assets. There can be large transactions in this section that don’t directly affect current year profit or loss, but they relate to the balance sheet and can be a significant outflow of cash.
  3. Cash flows from financing activities. Borrowings from and payments on term loans, lines of credit and capital leases are found in this section, as well as capital contributed by owners and dividends or distributions paid out to owners. This section will show if cash is coming in from new debt or possibly being used to pay down existing debt as well as cash paid out to owners, which don’t affect the net income for the year.

The three sections are totaled to show the net increase or decrease in cash for the year and then added to the beginning cash for the year to agree to the ending cash balance shown on the balance sheet.

Statement of Cash Flow Help

A basic understanding of the statements in your financial statement package and how they are interrelated can really help you understand the performance of your business and give some indications of things you can do to make it better. If you need assistance in making sense of these statements, contact Rea & Associates. Our team of Ohio accounting professionals can help you make your statement of cash flows work for you.

Author: Chris Roush, CPA (Millersburg office)

Are you interested in learning more about how you can make the most of your financial statements? Check out these other blog posts:

 

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