How to read a cash flow statement for your small business
Picture your business as a bustling ecosystem of money in motion. Understanding the ebb and flow of financial resources is essential for survival and growth. In this guide, we’ll look at your company’s lifeblood: the cash flow statement. We’ll decode the language of your small business’s financial health so you can master this tool that equips you to make strategic, informed decisions to thrive. Let’s dive in.
What is a cash flow statement, and why is it important for small businesses?
A cash flow statement tracks the inflow and outflow of cash, providing a transparent view of the company’s liquidity over a specific period. Unlike an income statement, which can include non-cash items, a small business cash flow statement reveals just what it indicates: pure cash transactions that impact the business’s ability to meet its obligations. That’s why it’s an essential reporting tool for evaluating a small business’s financial health and operational efficiency.
Understanding the cash flow statement for small business owners is critical because it highlights the company’s financial strengths and potential weaknesses. It’s categorized into three main sections:
Operating activities
Investing activities
Financing activities
We’ll get into these in depth in a bit, but it’s important to note that the statement of cash flows needs to be regularly reviewed for business owners to make informed decisions, plan for the future, and ensure there’s enough cash on hand (liquidity) for both expected and unforeseen expenses.
What goes in a cash flow statement?
Composed of three distinct parts – operating, investing, and financing activities, as we just mentioned – a cash flow statement displays how cash is earned and spent and how operations are funded. The goal is to determine the net cash flow, the sum of cash inflows minus outflows. Don’t worry – we’re not going to do any algebraic formulas here, but you do need to understand what each section of a cash flow statement means and how to interpret the figures.
For instance, a positive number in the operating activities section suggests a company is generating sufficient cash from its core business, whereas a negative number could indicate potential issues in profitability.
So, when analyzing a cash flow statement, scrutinize each section to assess the business’s health:
See if cash from operating activities is consistent
Look for patterns in investing activities
Evaluate how financing activities reflect the company’s strategy for growth and capital structure
To illustrate this, here’s a simplified example. If operating activities generated $10,000, investing activities used $4,000, and financing activities brought in $2,000, the net cash flow looks like this:
$10,000 - $4,000 + $2,000 = $8,000
This example shows a net increase in cash, implying the business is running on a solid financial footing (a good thing!). Now, let’s detail the three main parts of a cash flow statement.
Cash flow from operating activities
Operating activities are the primary source of a small business’s cash flow, reflecting the cash generated from its core products and services. This includes things like cash receipts from sales of goods and services, cash paid to suppliers and employees, income taxes, and interest payments.
This section can be compared to income statements. If a company reports a profit but has negative cash flow from operating activities, it could mean profits are held up in accounts receivable or inventory – that’s a warning sign. However, positive operating cash flow indicates that a company can sustain operations and generate enough cash to pay bills and other liabilities.
Cash flow from investing activities
Investing activities contain information about cash used for or generated from long-term assets. This section records purchases of physical assets like equipment, proceeds from the sale of assets, and investments in securities. Cash outflows here usually mean the business is investing in its future growth. For example, buying new equipment might decrease cash in the short term but increase efficiency in the long run.
However, large, continuous outflows could be a red flag if they aren’t balanced with adequate inflows or don’t eventually contribute to operating cash flow. Selling assets frequently, unless done for strategic realignment, can also cause concern about the company’s viability.
Cash flow from financing activities
The financing activities section accounts for cash flows related to borrowing, repaying loans, issuing stock, and paying dividends. It reflects how a business finances operations and growth, like getting a new loan (cash inflow) or paying off debts (cash outflow).
A new or young company might show significant cash inflows here as it raises capital for expansion, while an established company might display outflows related to dividend distributions and loan repayments. Always relying on new debt for cash could mean financial distress, while consistently repaying debt or paying dividends could mean financial stability and confidence in generating cash from operations.
Sample cash flow statement for a small business
Reading a cash flow statement properly empowers you to make informed decisions about managing resources, planning investments, and securing financing. Remember, the net cash flow, the summary of operating, investing, and financing activities, indicates the net increase or decrease in your company’s cash balance.
Here’s a small business cash flow statement example (quarterly):
| Categories | Amount (USD) |
| Cash Flows from Operating Activities: | |
| Net Income | 15,000 |
| Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: | |
| Depreciation | 2,000 |
| Changes in Accounts Receivable | (3,000) |
| Changes in Inventory | (2,000) |
| Changes in Accounts Payable | 1,500 |
| Net Cash Provided by Operating Activities | 13,500 |
| Cash Flows from Investing Activities: | |
| Purchase of Equipment | (5,000) |
| Net Cash Used in Investing Activities | (5,000) |
| Cash Flows from Financing Activities: | |
| Proceeds from Long-term Debt | 10,000 |
| Repayment of Loan Principal | (4,000) |
| Net Cash Provided by Financing Activities | 6,000 |
| Net Increase in Cash | 14,500 |
| Cash at the Beginning of the Period | 8,000 |
| Cash at the End of the Period | 22,500 |
Note: Figures in parentheses indicate cash outflows.
Creating a cash flow statement for your own small business
Whether you utilize the direct method cash flow, which details specific sources and uses of cash, or the indirect method cash flow, which adjusts net income for non-cash transactions, understanding the cash flow of your business is fundamental for sound financial planning and decision-making. Here’s how to create a cash flow statement for your small business:
Step 1: Choose your method
Cash flow statement direct method: list all cash receipts and payments
Cash flow statement indirect method: begin with net income and adjust for non-cash transactions and changes in balance sheet accounts.
Step 2: Break down the activities
Detail the cash transactions based on the three types of activities:
Operating activities: daily business operations.
Investing activities: purchase or sale of assets.
Financing activities: borrowing and repaying loans, issuing stock, and paying dividends.
Step 3: Calculate net cash flow
Here’s the net cash formula: operating cash flow + investing cash flow + financing cash flow
Step 4: Present the information
Organize the data in a clearly structured statement like this example of a cash flow statement for a small business:
| Activity Type | Inflows | Outflows | Net Cash Flow |
| Operating | $XXXX | $XXXX | $XXXX |
| Investing | $XXXX | $XXXX | $XXXX |
| Financing | $XXXX | $XXXX | $XXXX |
| Total Net Cash Flow | $XXXX | ||
Making informed business decisions
A cash flow statement sheds light on how well your company manages its cash position, revealing how money moves in and out of your business over a specific period. For modern-day small businesses, simplifying the task of cash flow analysis is vital.
Expensify offers robust integrations, enabling you to seamlessly import transaction data from bank accounts or credit cards, which is absolutely necessary for preparing a cash flow statement. With realtime expense tracking and categorization, Expensify helps streamline the reconciliation of operating activities, making it easier to digest your small business’s direct and indirect cash flows.
Plus, you save time – and reduce the margin for error in your cash flow statement, so you get the precise financial insights needed to make informed business decisions.
Review and update your cash flow statement
Below are the steps involved in reviewing and updating your cash flow statement:
Step 1: Start with operating activities
Incorporate all cash generated from your main business activities, including receipt tracking for sales and expense payments.
Step 2: Analyze investing activities
Record all transactions related to assets, like purchase or sale of equipment.
Step 3: Scrutinize financing activities
Note cash flows related to loans, dividends, and equity financing.
Step 4: Use the net cash flow formula
Calculate the net cash flow by adding all the cash inflows and outflows from the three categories above.
Step 5: Review and update often
Keep reviewing and updating this important statement to capture the true financial pulse of your business.
By adopting Expensify for your business, you can greatly enhance the accuracy and efficiency of tracking these figures, ensuring your cash flow statement remains the reliable tool for financial oversight that it should be.
Cash flow statement FAQs
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The main purpose of a cash flow statement is to provide detailed information about the cash that flows in and out of a business during a specific period. It tracks the company's liquidity and shows how well it can cover debts and fund day-to-day operating expenses. It doesn’t include non-cash items like income statements do, which means the cash flow statement gives a transparent view of the company’s cash position. The insights provided allow businesses to manage liquidity, make informed operational, investment, and financing decisions, and ultimately support more accurate budgeting and forecasting.
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A good cash flow ratio, often referred to as the “cash flow coverage ratio,” should typically be higher than 1.0. This means the business has ample cash to cover its debts. The ratio is calculated by dividing the cash flow from operating activities by the total debt that needs to be paid within the same period. A ratio greater than 1 indicates that a company has enough cash to cover liabilities, while under 1 could signal potential issues with liquidity.
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Generally, a high cash ratio is better because it indicates a company's strong liquidity position, financial stability, and efficiency in managing operating expenses. However, if it’s excessively high, it could mean the business is not effectively using its cash reserves to invest in growth opportunities. So, the bottom line is that achieving a balanced level that reflects security and intelligent investment is the ultimate goal for business financial management.
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A negative cash flow from financing activities in a cash flow statement indicates that the total cash outflows from financing activities exceed the cash inflows during a given period. This often happens when a business repays debt, pays out dividends, or repurchases equity shares. In these cases, it’s not inherently negative. But, if negative cash flow continues, it could mean that the company is not raising enough funds to support its operations or growth, which is something to be wary of.
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The average cash flow for a small business can vary by a wide margin, depending on the industry, size, and stage of the business. However, a healthy cash flow is typically positive and consistent. Small businesses need to generate enough cash from their operating activities to cover expenses, debt, and liabilities. In an ideal situation, cash flow should be sufficient to meet short-term needs, invest in long-term initiatives, and provide a buffer for the unexpected.
Ready to make creating your cash flow statements easier than ever? Give Expensify a try today by filling out the form below, and we’ll take it from there.
