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What Is a Cash Flow Statement and How Do I Read It?

As a business owner or manager, you know how important it is to have a handle on your business’s finances.  Most business operations can’t withstand financial mistakes and last very long. 

When surveying the financial situation of a business, there are several documents to consider. Most people know about the balance sheet and the income statement of a business. But there is a third document that’s important to consider when looking at the success of a business.

The cash flow statement provides important data about the viability of a business. Read on to learn about the importance of understanding a cash flow statement for your business. 

What Is a Cash Flow Statement?

A cash flow statement is one type of financial document all businesses should have. It shows how cash flows into and out of business. Cash may not be the only revenue source from a business, yet it paints a good picture of how money, specifically cash, moves through the business operations. 

A cash flow statement takes the balance sheet and the income statement and reconciles them in the form of a cash flow statement. Three basic categories of information are a part of the cash flow statement: operations, investment, and financing.

This statement shows the cash-related activities that are a part of your business for a specified period of time. 

What Should Be Included on a Cash Flow Statement?

A cash flow statement can help a business understand where the cash they have comes from. It can also show which parts of the business are using more, or even too much cash. 

Most cash flow statements are broken into those three categories: operating activities, investing activities, and financing activities.

Operating activities are those functions of the business required for day to day operations. This includes vendor payments, sales receipts from goods and services, and employee payroll totals. A business, for example, that uses a pay stub generator for payroll would subtract payroll costs from operations.

Investing activities might include the purchase of property or the acquisition of large assets for a business. Financing activities would include cash flow from investments through banks or other stock options, for example.

Why Is a Cash Flow Statement Important for a Business?

A cash flow statement helps to diagnose the health and wellness of your business. 

Knowing the cash flow statement focuses on operations, investing, and financing, you can get a good idea where you might be using too much cash or where your business is having issues with cash flow.

In the biggest business simpleton understands that a healthy business brings in more cash than they put out. The cash flow statement helps to define forecast growth and profitability based on patterns already in place. 

If you’re interested in growing your business with investors, the cash flow statement shows investors how well the business manages its cash.

Learn to Read and Create a Cash Flow Statement

The cash flow statement is one arm of the financial plan that all businesses should have. It gives an important outlook on how the business manages its cash flow and if they are making more than they are spending.

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