One of the key components of keeping your business on course is to maintain a positive cash flow. A periodic analysis will help you determine whether your business generates enough cash to meet your obligations and how cash outflow compares with incoming revenues.

The Cash Flow Statement

The cash flow statement reports your business sources and uses of cash during a specified accounting period. The cash flow statement adheres to Generally Accepted Accounting Principles (GAAP) and is divided into three categories:

  • Operating activities: The change in cash resulting from routine activities that either generate or require cash. This includes incoming receipts from the sale of goods or services, as well as dividend and interest income. In addition, there are outgoing payments for materials, salaries, taxes, and other matters. The net amount of cash from (or used by) operating activities is the most important figure on a cash flow statement.
  • Investing activities: The change in cash resulting from actions or events that involve the purchase or sale of company assets (securities, land, buildings) as well as paying or collecting on loans.
  • Financing activities: The change in cash resulting from payments to or receipts from suppliers of money to the company. For instance, money borrowed in the form of a loan represents cash receipts, while the repayment of loans represents cash payments.

What Do the Numbers Mean?

Here are a few simple steps to take to help make sense of the numbers. First, determine if your company generated cash from operating activities. If not, look at which components of your working capital are using the most cash and try to determine what might be happening.

Next, examine cash coming in or going out as a result of investing activities. Do the numbers shed light on problems that might be developing? For instance, if you have a reduction in capital expenditures, is this the result of bank constraints or pressure from creditors?

Finally, scrutinize your financing activities. How much debt has been paid or borrowed during the accounting period? This section will reveal any unusual financing activities that were not highlighted elsewhere in the analysis.

In short, look at how much cash has been generated from operating activities, how much has been used in investing activities (usually capital expenditures), and how much additional debt has been needed or has been paid down. In the final analysis, the cash flow statement can provide a valuable perspective on the overall financial picture of your business.

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