cash flowcash flow statement

Understanding Your Cash Flow

Money is coming in, but where is it going?  You may be hitting the ground running with new revenue opportunities and increased sales, but when you review the financials, you are scratching your head trying to understand where all that money went.  An understanding of your business’ cash flow can help.

Cash flows demonstrate when money is coming in and when it is going out.  If you were able to conduct your entire business with actual cash this would be breeze.  But, in today’s world, toss in credit purchases, loans, investments and extensions of credit to your customer, and you will see how cash flows become quite complex.

The first step to maintaining a clear view of your own cash flows is by creating a well structured cash flow statement for your business.  A cash flow statement is similar to your profit and loss statement, more simply P&L, as both represent activity over a period of time.  Whether for a single month or a full year, the cash flow statement shows you how certain balances related to cash flows change over the selected period.

This differs from a balance sheet which exhibits financial balances at a point in time. (You can learn more about your balance sheet in our previous post, here.)

The cash flow statement typically starts with the opening balances of your cash accounts at the beginning of the cash flow statement period.  These balances are then adjusted by cash flows related to operating activities, investment activities and financing activities.  In the end the statement will reconcile to your period end cash account balances.

Operating activities will make up a majority of your cash flow changes each month.  Sales receipts, expenses paid, general expenses paid, and employee costs would be part of this category.  It is important to remember that sales or purchases made on credit are not included in the cash flow activity, only actual payments made or received.

Investment activities are related to the sale and purchase of investments as well as any income, such as dividends and interest, received from investments.  Significant activity in this area can show you if you are reserving funds for future needs or moving funds from investment accounts to cash accounts.  Negative cash flow for this category indicates you are moving more funds to investments whereas positive cash flow is a sign you are withdrawing invested assets for other cash needs of the business.

Financing activities include both inflows and outflows related to invested capital, dividends, and long term debts.  For many business these activities occur annually or less frequently, so they play a smaller role in the regular management of cash flow.

There are alternative approaches to creating a cash flow statement.  The approach you should use may be dictated by the accounting principles and audit requirements for your business or industry. An accountant can help you with this.

Proper setup and recording of transactions in your accounting software will demonstrate if your business activities are appropriately balanced between incoming and outgoing funds in order to ensure your company is viable and profitable as you grow.  Simply monitoring your success based on your bank balances is not sufficient in today’s credit laden environment.

Regular reviews of cash will show you exactly where the money you bring in goes.  Even if you have a consistently positive cash flow, a regular review of your cash flow statement will enable you to answer questions such as:

  • “Should I invest more of my funds for future needs?”
  • “Am I over burdened servicing debt?”
  • “Can I afford to buy additional supplies or inventory at a bulk rate discount?”

Monitoring cash flow will aid decision making necessary to increase profits and grow your business.  Information derived from the cash flow statement will help you determine when it is feasible to expand your business, invest in new technologies, or accept new opportunities that require an upfront expenditure.  Whether this can be done with current cash available, by taking on additional debt or tapping into reserves, the answer will be found in your cash flow.

Without this information you, as the decision maker, may be flying by the seat of your pants and hoping for the best.  Using the tools included with your own set of financials, you can make informed decisions that consistently increase your company’s value and net income.


If you’re looking to gain more insight into your cash flows,

Arrow Cloud Bookkeeping can provide resources to help you prepare and understand the health of your business.  

Click here to have one of our dedicated accountants reach out to

schedule your free consultation!