IN THIS LESSON

The Cash Flow Statement is a scorecard that tracks cash flowing through the business.

Probably the most important financial statement for a small business is the cash flow statement. This lesson introduces you to the cash flow statement and how to use it for your accounting needs.

Lesson Overview 

In this lesson, you will:

Define the cash flow statement, and

Identify the components of a cash flow statement.

What is the Cash Flow Statement? 

Until you start offering credit to your customers and using credit with your suppliers, things are pretty simple. Cash comes in. Cash goes out.

Credit changes everything! The timing between your sales and purchases and your cash are different. Sales are flowing through your business at one rate and cash is flowing through the business at another.

In order to keep track of your cash, you need a scorecard that keeps track of the cash flowing through your business.

In accounting, this is called the Cash Flow Statement, or the Statement of Cash Flows. A cash flow statement is the financial document that presents where the money is coming from and how it is being spent.

Some Basic Rules 

While the income statement may have a negative net profit or bottom line number, a Cash Flow Statement should never have a negative ending cash balance.

If you have a negative ending cash balance it means you are bankrupt or out of cash.

More than fifty-one percent of all businesses that file for bankruptcy protection in the United States are profitable on their income statements, but because they could not collect on their sales through accounts receivable or because they didn’t plan their cash needs, they find themselves without any cash and out of business.

For these reasons, the cash flow statement is one of the most important documents in managing a small business and should be used as the primary financial statement.

Format 

In its simplest form, a cash flow statement is presented as follows: beginning cash balance, plus cash inflows, minus cash outflows, equals ending cash balance.

Cash Inflow

The cash flow statement details any sources of cash coming into the business.

There are only a few primary sources of cash inflow, such as cash collected from selling products or services, cash collected that was owed on account, loans made to the business, or new ownership equity placed into the business by a partner or investor.

These cash inflows are added together to produce the total sources of cash for the time period the statement covers.

Cash Outflow

The cash flow statement also lists any uses of cash by your business. This is cash leaving the business.

There are a few ways in which cash flows out of a business, such as purchasing assets, buying inventory, paying for expenses generated by the business, making payments to satisfy any liabilities of the business, or distributing earnings to the owners of the business.

These cash outflows are added together to produce the total uses of cash for the time period the statement covers.

The Ending Cash Balance

The ending cash balance on any cash flow statement is carried over as the cash balance to your balance sheet. This number is calculated by taking the beginning cash balance for the accounting period, adding any sources of cash, and then subtracting any uses of cash. This statement is simply the difference between your cash inflows and your cash outflows for the period.

Sample Cash Flow Statement 

Let’s take a look at an example of a cash flow statement.

For this example, the beginning cash balance is zero since you just started your business. You will then add in all the cash inflows, which will equal ninety-six dollars ($96.00). We will then subtract all the cash outflows, which equal eighty-four dollars and eighty cents ($84.80). This will bring a total to your ending cash balance of eleven dollars and twenty cents ($11.20).

Other Formats 

Sometimes the cash flow statement is presented in a format a little different from the one we just reviewed.

Some statements begin with the earnings of the business, or profits, and then add and subtract any changes in cash not figured in on the income statement. This format breaks down cash provided by operating, financing, and investing activities.

Here is an example of a cash flow statement presented differently. You will notice that the beginning cash balance is now at the bottom of the statement. In its place is the cash flows divided into the three categories of operating, financing, and investing activities.

Look carefully at each category. The numbers in parentheses are those being subtracted. Again, the total cash flow will always be the same as the ending cash balance.