What is a Cash Flow Statement? Cash is King | Bookvalu
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An Overview of the Cash Flow Statement

An Overview of the Cash Flow Statement

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The Cash Flow Statement is perhaps the most telling Small Business financial statement. It’s telling because the Cash Flow Statement measures all of the cash inflows and outflows of your business.

Cash is the lifeblood of a Small Business – without it, and the company dies. So its easy to see why the Cash Flow Statement is such an informative financial statement.

But what exactly is a Cash Flow Statement and how should a Small Business owner view this financial statement in the context of their business?

In this post, we will unpack the Cash Flow Statement starting with an overview and then dig into the components that make it up.

 

Cash Flow Statement Overview

The Cash Flow Statement summarizes a Small Businesses sources and uses of cash. In essence, it is a record of the cash flowing in and out of the company.

The sources of cash are those cash or revenue generating times through the sale of goods or services. One distinction we need to make here is that the Cash Flow Statement does not measure sales or revenue made on credit. So think of the Cash Flow Statement as a recording the actual cash flowing into your business.

On the flip-side, the uses of cash are the cash flowing out of business in the form of expenses or the purchases of assets. So when you purchase inventory or the inputs to produce the goods or services you sell, that is a cash outflow. Cash Flow Statement summarizes these cash outflow transactions in their appropriate category as we will discuss shortly.

A healthy Small Business Cash Flow Statement will show more cash coming in through the sources of cash than going out in the uses of cash. This is known as positive net cash flow.

Now, there may be times that a business is not able to achieve a positive net cash flow, but on the whole, for the Small Business to continue operating, in the long run, a positive net cash flow is imperative.

The value of any business often based on it’s discounted expected future cash flows. So what does that mean? Well, if the expected future Free Cash flows are higher, then mathematically a business will be more valuable, all else being equal as compared to another similar lower Free Cash Flow generating business.

The higher the company’s Free Cash Flow, the better. The ability to produce Free Cash Flow directly impacts the overall viability and valuation of the company.

Now, the amount of Free Cash Flow generated by a business is very dependent on the industry that they are a part of. A resource-intensive business like a Power Utility is likely to have lower Free Cash flow as they would have to invest heavily in high dollar equipment.

That’s a high-level overview of a Cash Flow Statement. Let’s dig a bit deeper and review each component.

A visual breakdown of a Cash Flow Statement is below:

 

Cash Flow Statement Components

Three main components make up a Small Business Cash Flow Statement. These sections summarize the cash inflows and outflows of the business and fall into three specific categories – Cash Flow from Operations, Cash Flow from Investments and Cash Flow from Financing.

We will now explore each in a bit more detail.

 

Cash Flow from Operations (CFO)

Cash Flow from Operations are the day-to-day cash flows of the business. In other words, the cash used in everyday functions like paying bills and receiving cash from selling items or services.

Example: Cash inflows generated by the sale of goods or cash outflows in the form of paying salaries.

The higher the Cash Flow from Operations a business has, the better. Why? It is essential that the majority of the cash accumulated by the company comes from its operations. In other words, the cash generated and consumed comes directly from its core operations rather than being borrowed, etc.

A business with high cash flow from operations means that the company likely has enough cash flow to run its day-to-day operations without the need to obtain a loan or issue equity.
Cash Flow from Investing (CFI):

 

Cash Flow from Investing (CFI)

Cash Flow from Investing is the cash used or generated by the purchase or sale of assets. So going back to our previous example, the generators purchased by the Power Utility would be a Cash Flow for Investing outflow.

Example: Cash inflows generated by the sale of an Asset such as a piece of equipment or a cash outflow when you purchase a building.

Cash flow from Investing can be looked at as a means to an end. By purchasing an asset with cash, the goal is to make that asset productive, in the long run, which will, in turn, increase the Cash Flow from Operations of the business. Said differently, it takes money to make money. It is necessary to deploy cash wisely to achieve the highest return on investment.

 

Cash Flow from Financing (CFF)

Cash Flow from Financing is just like it sounds; it is the cash generated from raising capital or taking on debt. So when you go to the bank and secure a line of credit, when drawn, the proceeds that are deposited into the company’s bank account are a cash inflow or Cash Flow from Financing

Example: Cash inflows generated by the taking out a Small Business loan or issuing stock in the form of Equity.

Issuing equity or obtaining debt through a small business loan is healthy and a necessity at times. It takes money to grow a business, and by taking out credit, you increase the cash you have at your disposal to grow the business.

On the flip side, the interest you pay on this loan will be reflected as an Interest Expense on the Income Statement, which is ultimately a reduction in cash.

 

Net Cash Flow (NCF) aka Change in Cash:

As we discussed in the overview, Net Cash Flow is the bottom-line measure of the Cash Flow Statement. Just as Net Income is the final measure for the Income Statement, Net Cash Flow summarizes the cash position of the business.

This one measurement is perhaps the most telling on the Cash Flow Statement. It showcases whether or not a business is generating positive or negative free cash flow.

Net Cash Flow = CFO + CFI + CFF

 

The goal of any business is to have a positive Net Cash Flow, which means that the business has deployed its capital wisely and is achieving a return for its owners.

Takeaways:

• The Cash Flow Statement is a summary of all of the cash inflows or outflows of the business.
• The Cash Flow Statement may be the most important financial statement.
• The Net Cash Flow of a Small Business = CFO + CFI + CFF


 

Bookvalu is QuickBooks Forecasting, Ratio Analysis, and Valuation software that provides financial visibility and insight for your Small Business.

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