Managing your business finances can feel overwhelming, especially when you’re balancing profit and loss statements or trying to make sense of balance sheets. But there’s another important tool that often gets overlooked—the Statement of Cash Flows. This financial statement shows how cash moves in and out of your business, helping you make smarter decisions to keep your business financially healthy.
In this blog, we’ll explain the Statement of Cash Flows in simple terms, break down its main parts, and show you how it can help you manage your cash better.
What is a Statement of Cash Flows?
The Statement of Cash Flows is one of the three key financial statements, along with the income statement and balance sheet. It focuses on cash—specifically, where it’s coming from and where it’s going. This is important because cash flow shows if your business has enough money to pay its bills and grow.
The Three Parts of the Statement of Cash Flows
The Statement of Cash Flows is split into three sections, each covering different types of cash movements:
1. Operating Activities: Day-to-Day Cash
This section shows the cash that comes in and goes out from your regular business activities, like customer payments and expenses. It’s the money generated by the core operations of your business. If this section shows negative cash flow, it might mean your business isn’t bringing in enough cash from its main activities.
2. Investing Activities: Growing the Business
Investing activities cover cash spent or earned from long-term investments, like buying equipment or property. While these transactions don’t happen every day, they’re important for the future of your business. Cash outflows here might include purchasing new machinery, while cash inflows might come from selling assets.
3. Financing Activities: Managing Debt and Equity
This section covers cash related to borrowing money or repaying loans, as well as raising or returning equity. It includes things like loan payments or money received from investors. Understanding this part helps you see how your business is funded and if you’re managing that funding wisely.
How to Build a Statement of Cash Flows
Building a Statement of Cash Flows is straightforward. Here’s a step-by-step guide:
- Start with your net income: This comes from your income statement.
- Adjust for non-cash items: Add back things like depreciation.
- Account for changes in working capital: Adjust for changes in things like accounts receivable, inventory, and liabilities.
- Summarize cash flows from investing and financing activities: Include major transactions like buying or selling assets or taking out loans.
- Calculate the net change in cash: Combine everything to see how your cash position has changed over the period.
Why the Statement of Cash Flows is Important
The Statement of Cash Flows gives you a clear picture of your business’s cash health, which is crucial for making decisions. Here’s why it matters:
- Liquidity: It helps you see if you have enough cash to meet your short-term needs.
- Better cash management: You can track where your money is coming from and where it’s going.
- Growth opportunities: It shows how much you’re investing in your business’s future.
- Funding decisions: You can see how you’re managing debt and equity, helping you make better financial choices.
How Accredited Bookkeeping Can Support Your Business
At Accredited Bookkeeping, we understand the challenges small businesses face when it comes to managing finances. We’re here to help you streamline your bookkeeping processes, avoid unnecessary financial errors, and gain greater clarity about your financial health. Our services are designed to fit the specific needs of your business, giving you peace of mind while you focus on growth.
Contact us today for a free consultation and discover how we can make bookkeeping easier for you.
📧 marianne@accreditedbookkeeping.com
Marianne Kirwan
📞 352-626-0116
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