Small Business Cash Flow Statement in Plain English

If you’re like most small business owners, you find 15^th century Greek easier to understand than cash flow statements. On your list of priorities reviewing your cash flow statement is right after organizing all the paper clips in the office by color. In other words, I’ll get drafted by the NFL as a linebacker before it heads the day’s agenda.

It’s time to change that priority, and unlock the easy ways you can use a cash flow statement to manage your business. A common mistake is to assume that if your business records a net profit your bank account balance will also go up. This can lead to cash flow issues, and in the worst case scenario, a rapidly growing business can actually fail.

Cash Flow Statements tell you if your bank account balance has gone up or down and why at a glance.

Let’s get started.

Small Business Cash Flow Statement: Defined

Small business owners often express their frustration with the complexities of financial statements. “Yes but what does it really mean?” is a question I hear all the time. What they are really asking is, “What does this mean to my bank account? Will I profit by it?”

Entrepreneurs start businesses to make money, and are looking for a simple tool that explains why their bank balance is higher or lower at the end of the month than the beginning of the month. While assets and inventory are great, you can’t walk into your local office supply store and offer to pay using the 20 widgets you have in stock.

Your cash flow statement tells you what money came in the door, what money went out the door, why it went out the door, and how much higher (or lower) your bank account balance is at the end of the period.

Small Business Cash Flow Statement: Reading at Glance

There are four main categories in a cash flow statement;

i. Cash Flows from Operating Activities

ii. Cash Flows from Investing Activities

iii. Cash Flows from Financing Activities

iv. Net Increase in Cash

Cash Flows from Operating Activities

This section covers all the revenue and expenses associated with delivering goods or services to your customers. If your business is making and selling gourmet dog treats (I kid you not this IS a viable business), this section summarizes all the revenue from selling those doggie biscuits. It also summarizes all the cash that went out the door to make and market Fido’s treats. Common entries include net income, depreciation and amortization, inventory, income taxes, accounts payable, accrued expenses, and prepaid expenses.

Bank Account Impact: The final number in this section represents how much your business bank account has grown, or shrunk, by selling your goods and services.

Cash Flows from Investing Activities

This section summarizes all the expenses and revenue from activities that don’t directly serve your clients. Buying or selling commercial property is a great example. You don’t have to buy a new commercial space to bake your biscuits for Fido. If you later decide to sell that property for a profit, the revenue was not generated from gourmet dog treats. Other common entries include buying or selling equipment (a bigger oven to bake the biscuits) and long-term investments.

Bank Account Impact: The final number in this section represents how much your business bank account has grown, or shrunk, by your investment activities. Keep in mind a big negative isn’t necessarily bad. An investment in new equipment or space signals growth. However you need to be sure you have enough cash on hand or pursue a loan or line of credit to cover the expense.

Cash Flows from Financing Activities

This section includes the impact of short and long term loans, dividends and the owner’s draw. When you take out a loan, or draw from a line of credit, the incoming cash will be recorded here. Never forget that this is not earned revenue, but a debt that must be repaid. Payments made on loans will show up in this section as an expense.

If you withdrew funds from the business bank account to put in your personal bank account that will show up as an expense here. The accounting designation is Owner Draw. In plain English it’s when you as the owner take profit out of the business.

Bank Account Impact: The final number in this section represents how much your business bank account has grown, or shrunk, due to loan payments, funds borrowed, and any owner payouts.

Net Increase in Cash

This number is the final impact on your bank account for the period. If this number is positive, your actual cash on hand grew. If this number is negative, your business bank account balance fell.

It’s important to keep in mind that there are times, particularly when a company is experiencing rapid growth, that negative cash flow does not indicate a failing company. However the smart small business owner keeps an eagle eye on their bank balance, and pursues financing options, such as a loan or line of credit, before a crisis happens.

Final Thoughts

Although I’m still waiting to hear from the NFL, I hope you’ve decided to upgrade cash flow statements as a priority. Taking even 10 minutes a month to review this report will deliver insights on how all the money in your business is being spent, what really happened to your bank account balance, and if you need to pursue funding for business growth.

WHAT’S NEXT

For more articles and advice about Small Business Finance, click here.

Read more:

• A Quick Checklist for Positive Cash Flow
• Best Free Accounting Software