How to Read a Cash Flow Statement

“cash flow statement

Mark’s technology company was hiring like crazy. Their growth was through the roof. Then the penny dropped. It seemed like it came out of nowhere. A few key clients were late paying their invoices. Suddenly, money was leaving the company faster than it was coming in. Monitoring his cash flow statement had been the furthest thing from his mind, until he experienced his first cash flow crisis.

Sarah’s trucking company was already struggling with rising fuel costs. Then one of her drivers was in a traffic accident and found to be at fault. The deductibles from the insurance were crippling and unexpected. Her family-owned business that she’d taken over from her father was in danger. If she had been watching her cash flow statements more carefully, she could have seen that her cash reserves were dwindling.

Cash flow is one of the main reasons businesses fail. In Wasp Barcode’s 2017 State of Small Business Report, cash flow was one of the top five concerns, cited by 34% of the businesses that were surveyed.

None of these businesses planned to make a mistake by overlooking the importance of a cash flow statement. They were all doing what they thought was best — taking care of business. At PayPie, we make it easier for businesses to take care of business by offering free analytics and insights that include a cash flow statement.

34% of businesses consider cash flow a top concern

What is a cash flow statement?

A cash flow statement (statement of cash flows) is an analysis that shows how much cash is moving in and out of a business during a given period of time.

One of the “big three” financial statements for any business, a cash flow statement both pulls from and supplements the information in your balance sheet and profit and loss statement (income statement).

A cash flow statement shows how changes in the balance sheet and profit and loss statement affect the inflows and outflows of funds for a business.

What’s included in a cash flow statement?

A cash flow statement is generated from an analysis of the revenues and expenses in three main areas:

  • Operating activitieshow much you made — determined how much cash you made or spent to produce the goods and services you sold.
  • Investing activities — how much you spent — shown by how much cash you used or made through buying or selling capital investments.
  • Financing activities — how much you owe — based on how much cash flowed in and out in relation to business loans or other funding transactions.

The amount of cash a business earns or spends in each of these activities is then summarized into an opening and closing cash balance. The summary of the cash movements from all three activities is the net cash movement or total change in the company’s cash position.

If the closing balance is greater than the opening balance, then you have a positive cash flow. On the other hand, if the closing balance is lower than the opening balance, your cash flow is negative.

If, at this moment, you’re feeling like you’re holding an Allen key and trying to assemble European flat-packed furniture, take a deep breath. The above is a top-level overview. In order to show how each of the activities is broken down and combined to create a cash flow statement, we’ll go through each one below.

Cash flow from operating activities (CFO)

Operating activities are all the functions related to producing or providing a company’s product or service. This includes inventory, accounts receivable, payroll and related taxes, like sales tax.

One of the benefits of examining CFO activities and comparing them to net income is that it shows how well a business managing its operations. If everything is going to plan, your CFO will be positive. A negative CFO could come from any number of inefficiencies ranging from pricing issues to outstanding invoices.

Another reason why CFO is so important is that it’s also the main way that small to midsized businesses finance themselves. In other words, this is where your “spending money” comes from.

Recording CFO in a cash flow statement can be done either by the direct or indirect method.

  • The direct method uses the cash-based system of accounting that only tracks payments that were actually made or received by the business.
  • The indirect method uses the accrual system of accounting where payments are recording before they’re actually received by the company.

If you’re not familiar with accounting methods, here’s what you need to know: Cash-based and accrual are the two most common accounting systems. This also means that both the direct and indirect methods of calculating operational cash flow are valid. Ultimately, the choice comes down to what’s best for your business.

Some businesses choose the direct method because it leaves out non-cash transactions. While other businesses choose the indirect method because they are able to pull numbers directly from their balance sheets and profit and loss statements.

When you run a free financial assessment from PayPie, we use the indirect method to report CFO. You CFO information will also be broken down visually with charts and graphs to help you see the patterns in your numbers.

Cash flow from investing activities (CFI)

The second area, cash flow from investing activities covers purchases or sales of items that are considered long-term investments. Investing activities can include business equipment, buildings or real estate and even securities. Again, a lot depends on your business, your industry, stage of business and other factors.

One of the reasons the inflows and outflows from investing activities are separated out is that many of these purchases are considered capital items. At tax time, large purchases are depreciated over time, meaning you can only claim a certain percentage of the costs over a specific number of years.

Funds invested in purchases are considered outflow and funds made from the sale of investments are inflow.

When reviewing CFI, remember it’s a long-term play and the results are taken into consideration along with other activities. For example, if you’re business is in growth mode, you may be investing in equipment and other capital to help fuel further growth.

Cash flow from financing activities (CFF)

Depending on the size and structure of a business, cash from financing can include the size and payment amounts of business loans or the payment of dividends for incorporated businesses. For startups, this would include fundraising as well as any amounts paid to investors.

Using a small business loan as an example, the money your business receives from the loan is counted as an inflow, while the loan payments are outflows.

A business’ CFF is used as a variable for measuring equity (ownership) as well as lending risk. For example, if you have a lot of debt, but it’s not being used to fuel growth or produce results, you would want to start thinking of ways to pay down the debt. Similarly, an outside business or analyst might also highlight or a high level of debt as a consideration or concern.

Learn another way your company is evaluated in terms of risk.

How often should you run a cash flow statement?

The general consensus is monthly. However, if your cash flow changes quickly or you’re a new business, you may want to consider looking at your cash flow every week.

Once you make creating a cash flow statement a routine part of your financial analysis, you’ll start to build a history of your cash flow. In turn, this will help you identify trends, such as when your cash flow peaks or hits valleys.

The more you learn, the more you’d wish you’d started tracking your cash flow even earlier. It’s sort of like eating your vegetables. Your body needs the nutrition and will be better off for it — even if you have to talk yourself into it the first few times.

Check cash flow monthly

What can a cash flow statement tell you about your business?

By identifying and recognizing patterns in your cash flow through regular analysis, you’ll be better able to predict or prevent challenges, like finding yourself low on cash right before running payroll or experiencing a negative cash flow when an invoice payment (due to your company) is running late.

If you see a cash flow gap coming, you can take measures like finding short- or long-term financing, working with a vendor to see if you can extend a payment timeline or, if necessary, adjusting labor costs.

When your cash flow is positive, you’ll also be in a better position to plan your growth by timing when you choose to act on a strategic decision, like purchasing new equipment, launching a new product or hiring more staff.

Understanding how your cash flow works gives you insights into the financial strength of your business. It tells you where you can improve and where to keep doing exactly what you’re doing.

If you’ve got a handle on your business’ financial health, it will be unmistakable to others wanting to do business with you as well. It’s sort of liking going into a job interview highly prepared rather than just winging it.

Learn how all of your financial statements impact your company’s financial health. 

Is there an easy way to run and read a cash flow statement?

Yes, there is. When you use our free analytics and insights, they include a cash flow analysis. At PayPie, our mission is “To empower businesses by enabling better, more affordable ways to improve financial health.” Offering a complimentary assessment that’s easy to read and understand is simply the first step in the many ways we aim help businesses take control of their finances.

If your company uses QuickBooks Online as its accounting software, you can start right now. Other integrations and innovations are coming soon.

This article is intended to be informational only and does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional.

Image via Pexels.

 

Reporting, Cash Flow and Your Business’ Financial Health

business owner reviewing financial statements on a computer

While you know that financial standing of your business is important, it’s actually a pretty difficult topic to discuss. Business financial health involves all sorts of accounting and financial terms, which don’t always roll off the tips of everyone’s tongues. But, more than that, most business simply have no idea where to start.

Rather than waiting until you have a cash flow crisis, using insights and analysis can help you better understand the financial health of your business.

What is business financial health and how do you measure it? 

Like 64.4% of businesses, you use accounting software to help keep your finances on track financial health by systematically recording your income and expenses and other crucial data. In turn, this information becomes the foundation for key financial statements, like your balance sheet, profit and loss statement and cash flow statement.

Why should you routinely review your business’ financial statements?

According to Mike Kappel, CEO of Patriot Software, the best way to measure success is to look at your financial statements. “Measuring business performance means checking out the money flow (cash flow) of your business. If you want to see how profitable your business is, check out the financial statements.”

The challenge with financial statements…

While most business owners recognize the significance of reviewing their financials, business coach Adam Sonnhalter notes that he and his business partner have seen “Grown, husky men cry when we ask them to tell us what they see on their financial statements and tell us what the numbers mean.”

The difference between financial statements and financial reports

In truth, the terms are often used interchangeably. However, in the world of business accounting, there are inferred differences.

  • Financial statements are often considered internal documents intended for stakeholders within the business itself.
  • Building upon, summarizing and visualizing the data from within the business statements, a financial report (business assessment) is most often used to quantify or substantiate the business’ performers to external stakeholders, like lenders.

Financial assessments and analysis bridge the gap between having the numbers in hand and actually having a handle on what they really mean. When financial insights are presented in a clear, concise report, it’s easier for business owners to see what these numbers are telling them about the financial health of their company.

Although in a textbook sense, reports have traditionally been used to provide information to third-parties, the financial analysis and insights within the reports are also highly valuable to the businesses themselves. After all, you can’t make informed decisions if you don’t have the right information in the first place.

Putting all the pieces together

In order to get the information you need to measure your company’s financial health, you need to know what you’re looking for, where to find it and what it all means.

The four main indicators of a business’ financial health

In an article written for Investopedia, contributor J.B. Maverick writes that liquidity, solvency, profitability and operating efficiencies are the four main areas that should be examined to determine a business’ overall and long-term financial health.

  • Liquidity — The amount of cash or assets easily convertible into cash that a company has available in order to meet short-term obligations.
  • Solvency — A company’s ability to meet long-term payment responsibilities.
  • Operating efficiency — A measure of how much profit the company makes with each transaction, once the cost of production or providing the services is accounted for.
  • Profitability — Put simply, this is whether or not the company is making money.

Your financial statements — what they are and what they tell you

There are three financial statements that a business should produce and review on a regular basis for the data needed to measure financial health and inform better decision making in relation to your financial health.

A balance sheet (statement of financial worth or statement of net worth) compares a company’s assets to its debts detailing what it owns versus what it owes. Assets are listed in order of liquidity (how quickly they can be converted to cash) while liabilities are listed in the order in which they’ll be paid.

A balance sheet is often described as a “snapshot” of one particular point in time in company’s financial history. The date at the top of the balance sheet tells you the period of time (year, quarter or month) for which the information applies.

A business’ working capital ratio (assets divided by liabilities) is derived from the information provided in the balance sheet.

balance sheet

While a balance sheet shows how well a business is managing its liabilities, a profit and loss statement (P&L statement, income statement or statement of operations) tracks revenues, costs and expenses over a quarter or fiscal year, providing measures of profitability.

Answering the question, “Is this business profitable?” — a P&L statement starts with top-line revenue items from which the costs of doing business, such as costs of goods and services (COGS), taxes and other operating expenses are deducted. The resulting amount is the famous “bottom line.”

Gross profit margin (gross profit divided by revenues), operating profit margin (operating earnings divided by revenue), net profit margin (net profit divided by revenue) and operating ratio (operating expenses divided by net sales) are generated from a business’ P&L statement.

profit and loss statement

A cash flow statement (statement of cash flow) is the third document in this trifecta. By comparing metrics from a business’ operations, purchasing and borrowing activities (merging the balance sheet and P&L statement) it shows where a company’s money comes from and where it’s going (or has gone).

A company’s cash flow ratio (operational cash flow or free cash flow) represented as the operating cash flow divided by current liabilities is considered a measure of operational efficiency and solvency.

The difference between cash flow and profitability

Cash flow and profit are not the same things. This is because unlike the balance sheet and P&L statement, a cash flow statement doesn’t account for future funds coming in or out of the business as credit, such as paid or unpaid invoices.

It’s possible for a business that’s profitable to have limited cash flow, especially if a business’ inventory, accounts receivable or fixed assets are growing rapidly. Unlike Fortune 500 companies with large cash reserves, independently owned businesses are more likely to reinvest their funds into their business — as a result, they are also more likely to be cash poor.

What financial reporting can tell you about your business’s financial performance

A financial report takes the information in a business’ financial statements and translates them into analysis and insights. A business assessment, like the one generated by PayPie, puts your cash flow, debts, assets and other factors related to financial health front and center.

The assessments we generate are a visual way to help you understand the metrics that matter most to your business’ financial health. In your report, you’ll find charts, graphs and other breakdowns that help give you the big picture of what you need to know in order to make the right decisions for your business.

How does it work? Simply sign up for PayPie, connect your accounting software to use your current financial information and you’re ready to go.* You may also run an assessment as often as you like — free of charge — to help you start building a history of your progress.

Ready to improve your business’ financial health? Then click here and get started now!

*PayPie currently integrates with QuickBooks Online. Additional integrations are coming soon.

This article is intended to be informational only and does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional.

 

Stock photo from Pexels.

Improving Your Cash Flow in a Click

Do you remember the last time you tried to get some quick financing for your business? I bet it wasn’t the best of experiences, right? These procedures usually take forever and still give you a less than satisfactory answer in the end. Even when trying multiple sources at a time can be frustrating since they all can take forever to make a decision that should be decided in seconds instead of weeks.

Gladly, technology is bringing the ultimate solution for this recurring pain point. Starting early next year, things are going to change and a new opportunity will be created where you will be able to get instant financial approvals against your outstanding invoices. Using a simple process, you as a business connect your accounting data with PayPie and let the magic happen.

PayPie will analyze your relevant financial transactions and will assign the most accurate credit risk score for your business. This will enable you to radically change the performance of your business since your data will be automatically integrated and you won’t have to manually enter any data or invoice. The days of making mistakes and wasting time entering data in different platforms are over.

If you are one of the millions of businesses using online accounting software like QuickBooks Online, Sage, or Xero, you are in for an early treat. You will be among the first ones to harness technology to solve your cash flow problems.

We will integrate with all major accounting software so that we fit naturally into your workflow to become an app that you love and use on regular basis. PayPie will truly deliver end-to-end intuitive experience that is easy to use right from within your accounting software.

PPP token holders are creating efficiencies through technology and automation for you allowing you to focus 100% on your business so that you can take advantage of the countless business opportunities that unveil.

The liquidity provided can be used for further inventory purchase, equipment purchase, or just to hire a new employee to catapult your marketing efforts. We are here to help your business grow and ensure long-term success. With PayPie at the heart of your short-term liquidity needs, there is no better friend today.

Sign up for our short-list now and we’ll promptly inform you once we’re are ready to take live credit risk score of your business to the pool of worldwide lenders, first time ever powered by the blockchain: https://goo.gl/forms/sdDMx1ANQ532aN9I2

 

 

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