Deciphering the Statement of Cash Flows


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Chances are you’ve heard of the Balance Sheet (or Statement of Assets and Liabilities) and Income Statement (or Statement of Income and Expenses), but you may not even know there is a third financial statement. That statement is called a Statement of Cash Flows. If you believe that when it comes to your business that cash is king, then this is the royal decree. It tells you which way your cash is flowing.

Here are some basics for understanding the Statement of Cash Flows.

Cash Flow Cycle

First, let’s look at the typical Cash Flow cycle for a business as you see it on your set of financial statements.. Money comes in to the Profit & Loss (or Income Statement), Cost of Goods Sold (COGS) are deducted to give you the Gross Profit. The G & A (General & Administrative) expenses are deducted to give you Net Income. That’s all reported on the Income Statement.

That’s where the Statement of Cash Flows comes into play. The Net Income, which is the bottomline number on your Income Statement is then reported first on the Statement of Cash Flows.

The whole purpose of the Statement of Cash Flows is to translate Net Income Into Cash. This is what answers the age old question, “Where’s the money?” You may have Net Income and owe taxes, but not have a dime to pay them with. And you may never have taken anything out of the business. How can that be? The Statement of Cash Flows will tell you what happened.

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Or maybe you have cash in the bank and are losing money in your company. You might be lulled into thinking all is well, but long term, you can’t sustain. Where did all the cash come from? The Statement of Cash Flows will tell you what happened.

So, starting with the Net Income from the Profit & Loss, there are adjustments made to the figure, either increasing with cash flow from (Operation, Financing or Investments) or decreasing with cash flow to (Operation, Financing or Investments).

This cash change is reflected in the cash of the Balance Sheet.

Even though there are the same basic financial statements and there are arrows like the cash flow habits above, you see that this is an entirely different cycle. The cash flow cycle shows you how cash is created or used in your business. It’s all about the business.

It doesn’t tell us if you then take the money and buy appreciating assets that put money in your and the business’s pocket or you use the money and credit to buy depreciation assets or doo dads. Those are the habits that determine whether you will be poor, middle class or rich. The cash flow cycle tells you what’s happening with your business today and predicts what will happen with the future.

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One Comment

  1. Marcel says:

    It is a little something I have to do more research into, appreciate the posting.

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