In most small businesses, revenue doesn’t always match up with spending, so understanding your cash flow is critical. The cash flow statement—also known as a statement of cash flows—helps you evaluate whether there is enough money coming in, and enough cash on hand, to pay your bills. In financial accounting, a cash flow statement provides a snapshot of your cash balance.
The cash flow statement helps you look back over a specific period (typically a quarter) to predict the net cash, or amount of cash, you will need over a specific accounting period to fund your operating activities.
Cash flow should not be confused with profit. Profit refers to the difference between revenue and cost over a period of time, whereas cash flow measures your cash on hand. A small business may be profitable but still not have the cash needed to pay employees, vendors, or creditors. Businesses need to manage cash flow to ensure that there is enough money coming in to pay the bills today.
The cash flow statement is one of the three key financial statements used to assess a company’s financial status. The other two are the balance sheet and the income statement. All three financial reports work together to provide insight into the financial position of the business. For example, the ending cash balance in the statement of cash flows should equal the ending cash balance in the balance sheet.
A cash flow statement is used to attract new investments, inform your fundraising efforts, and get more access to financing options. For banks and creditors, your cash flow statement provides some reassurance that your small business is able to pay back its loans or fund its own operating expenses.