The Cash Flow statement understood

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While not all small business owners fully understand the Income Statement and Balance Sheet, most recognise them and have a broad idea of what they are and how to use them. However, the Cash Flow Statement is probably the financial report most responsible for confusion, blank looks and mild panic in small business owners.

It is typically used more by your accountant, potential investor or the bank than by the business owner themselves – but this is a shame, because it’s actually an extremely handy report that can give you some very valuable insight into the health of your business.

While the Income Statement represents the profitability of your business, the Cash Flow Statement represents the liquidity of your business – how fast and how easily you can cover your debts and keep running.

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As the name implies, the Cash Flow Statement shows the flow of money through your organisation. It details inflows and outflows of money over a specified time period. It is important to note that this report deals with the flow of your cash over a specific time period and not with the value of your cash on a specific date.

The Cash Flow Statement deals with differences in physical cash received and paid, as opposed to the Balance Sheet and Income Statement which include accrued items – items that have been billed (to and by the company) but not yet paid. These reports also show the value of specific accounts at specific dates, whereas the Cash Flow Statement deals with the change in cash over time. As a result of these two discrepancies, the Cash Flow Statement very rarely matches figures on the Income Statement and Balance Sheet, resulting in complete confusion and causing a lot of small business owners to simply avoid the Cash Flow Statement completely.

Broadly speaking, a business brings money in through sales, financing (loans) and returns on investments. Money flows out of the business on supplies, services, utilities, taxes, loan payments and debt. Being cash flow positive means that more money is coming into the business than is going out – this is the position all businesses want to achieve.

The Cash Flow Statement organises and reports cash flows in three categories: Operating, Investing and Financing.

Operating Activities represent the main source of the business’s cash generation – in other words, what it costs you to run the company. A strong, positive cash flow from operations is a good sign of a healthy company. It means you are bringing in more money than you are spending. If you have consistent levels of cashflow from Operating Activities over long periods of time, then the company is able to fund its operations – in other words, it does not need permanent outside funding in order to exist.

Investing Activities are changes in assets and investments, in other words money put into items that have value and that the company will hold onto for a long period of time. Cash changes here are normally outflows because the cash is used to purchase equipment or buildings or stocks. When a company sells an asset or cashes out an investment, it will generate an inflow. A healthy company continually invests in assets and should therefore have consistent cash flows in this section.

As the name suggests, Financing Activities are business activities related to the cost of financing the business. These will be the changes in debt, loans, stock options, capital and dividends. This section shows how borrowing money (and paying it back) affects the company’s cash flow.

The “bottom line” on the Cash Flow Statement is the net result of all increases and decreases to cash and cash equivalents – in other words, the change in your bank balances and cash on hand. If your Balance Sheet from 31 March had a bank balance of R100 000 and your Balance Sheet from 30 April has a bank balance of R150 000 then the bottom line of your 01-30 April Cash Flow Statement should show a figure of R50 000 – the nett increase in your cash on hand.

The “bottom line” should not just match the difference in your balance sheets, it should also balance back to all the inflows and outflows in the three sections because it makes sense that the change in your bank account will be the result of everything you have received less everything you have paid.

When assessing your own Cash Flow Statement, look for the following:

• You want healthy cash inflows from Operating Activities.
• You want decent cash outflows to Investing Activities.
• You want your Operating inflows and Investing outflows to be bigger than your Financing outflows.
• You want a positive bottom line – nett growth in cash.

In other words, you want your company to have enough cash to sustain itself and to grow. And you want to spend more on your growth than you do on your debt. Plus, you want to do all this and still have cash available at the end of the day.

Learning to use this report can change the way you run your business – a business with healthy cashflow is a healthy business!

Read more: Financial Terms you simply must know and understand.


Tamryn Dicks
Tamryn Dicks

Tamryn Dicks is a SAIBA Business Accountant and a SAIT Tax Practitioner. Her company, Pharsyde Accounting, offers payroll, bookkeeping, accounting and tax services to small business owners in South Africa. Send her questions: info@thepharsyde.com or visit: www.thepharsyde.com


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