Cash flow statements are one of your most important financial reports. Divided into three sections, cash flow statements can help you pinpoint profitable and problematic areas in your business.
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The cash flow statement is one of the most important reports a business can run. Like a balance sheet and profit and loss statement, the cash flow statement provides information on the health of your business and is frequently used by investors and financial institutions to assess profitability.
In this short guide we’ll explain what a cash flow statement is and why understanding a cash flow statement is so important for your business.
Overview: What is a cash flow statement?
So what exactly is a cash flow statement? And what is cash flow? In accounting terms, cash flow is the amount of cash that flows into and out of your business.
In turn, the cash flow statement, also known as the statement of cash flows, provides detailed information on all cash related activities that have impacted your business during a specified period of time.
While calculations such as a quick ratio can be helpful in measuring the ability of a business to pay bills, a cash flow statement provides a much more comprehensive picture of your finances.
As cash flows in and out of your business on a daily basis, the cash flow statement is divided into sections that provide detailed information on all cash activities as well as any investing and financing activity, helping to pinpoint cash flow issues and where they may originate.
Sections of a cash flow statement
While knowing the cash flow of your business is important, it’s especially important to know where the cash inflow and outflow originates.
For instance, if cash flow is bogged down by excessive operating expenses, you’ll be able to spot that in your cash flow statement since it’s divided into three sections: operating activities, investing activities, and financing activities.
The cash flow statement below shows cash inflow from operating activities and investing activities such as accounts receivable turnover, while also displaying cash outflow in financing activities.
The operating activities section of the cash flow statement reflects cash use within a business. This can include general day-to-day operating activities such as vendor payments, sales receipts from goods and services, and employee payroll totals.
In the cash flow statement above, operating activities such as customer receipts, interest received, interest paid, and payments to vendors and employees are included in the operating click over here activities section, which displays cash inflow of $214,.
Any change in working capital such as the purchase or sale of any asset such as buildings or land are included in the investing activities section. Transactions like loans, acquisitions, mergers, and cash investments are also included.
Investing activities in the above cash flow statement include proceeds from property sales, as well as payments for property, plant, and equipment. Total cash inflow for investing activities is $.
The financing activities section of the income statement provides information on incoming cash from investors and banks. Dividend payments, the sale of company stock, and the sale or repurchase of company stock are included in this section, as is the repayment on any outstanding principal.
On the balance sheet above, financing activities include proceeds from loans, repayment of a long-term loan, and other cash items from financing activities. Cash outflow from financing activities is ($45,596).