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“So, I know what I have and how much I earned, but where did that money actually GO?”

The Statement of Cash Flows is probably the least known and appreciated financial report among business owners.  However, this is report that tells you the vital information how you generated or used cash in a given period.   Basically, it show how the changes in your Balance Sheet (Assets, Liabilities and Owner’s Equity) along with your net income affected your cash flow.

The Statement of Cash Flows is divided into these sections:

Operating Activities: This is where the cash flow of day-to-day business such as sales and expenses, plus changes in working capital (A/R, A/P, inventory, etc.) and are detailed.

Investing Activities: This is where your acquisitions/disposals of building, equipment or long-term financial assets are detailed.

Financing Activities: This is where inflows/outflows of cash when you borrow or re-pay debt or pay dividends are detailed.

Here’s an example of a very basic Statement of Cash Flows:

In the statement above, the business had a nice inflow of cash after accounting for operating activities.  However, when the purchase of the web domain (an intangible asset) and the loan payment are accounted for, the result is a decrease in cash of $200.00 for the month.

The Statement of Cash Flows can tell you a lot about how the business is being managed and will be the focus of savvy lenders and potential investors who want to know if your Income Statement profits convert into cash that can pay them; it is also where red-flags of impending problems first surface.

For example, a classic problem of a young successful business is a cash squeeze where sales are rising rapidly and your Income Statement shows a net profit, but investments into the business are high and cash is short to replenish inventory to support that sales growth.  Paying close attention to the Statement of Cash Flows will let you get a jump on this paradox of success.

When combined with the Balance Sheet and Income Statement, you have a clear picture of your business’s health.


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