When it comes to money, ‘easy come, easy go’ is not a phrase that any business would want to use to describe its cash flow statement situation. Businesses, especially small and medium ones, depend on a steady flow of cash to meet their routine financial responsibilities (paying salaries, upfront payments to suppliers, loan repayments, etc.)
If this flow is disrupted, small businesses have few to no recourses to help tide them over their losses. The only way for a business to know that it is making sound strategic choices, and to protect itself from unpleasant surprises, is to generate financial statements. A financial statement is a composite of three types of financial records: a profit and loss or income report, a balance sheet, and a cash flow statement.
Balance sheets reveal the status of a business’s liabilities and assets on the day the report was compiled, while income statements provide a broad overview of a company’s composite earnings and expenses over a period of time.
The cash flow statement, on the other hand, disaggregates the individual sources of an organization’s income, how it spends its money, and what it spends its money on, within a specific timeframe.
Confessions of a cash flow statement Cash flow statements don’t always make for dramatic reading, but they help to track those activities (operating, investing, financing) that utilize the cash that comes in, and to what degree they do so.
Cash Flow from Operating Activities (COO): This includes the revenue from sales of services and goods, as well as interest and dividends from debt instruments and equities. It also entails expenses such as salaries, and payments to lenders and suppliers, and taxes.
Cash Flow from Investing Activities (CFI): This encompasses cash that accrues from the sale of fixed assets such as plants and land, and current assets such as debt and equity instruments, and loan principles (if your company has lent money).
Cash Flow from Financing Activities (CFO): This refers to the acquisition or disposal of debts and shares. Selling debt and equity instruments bring in money; payment of share dividends, and redeeming capital stock or long-term debt moves money out.
Categories Cash flow amounts facilitated by these activities are then compiled to come up with total earnings and expenses. This is how the composite figures are calculated and presented:
Opening balance: The amount in your account at the beginning of every month.
Cash incoming: A list of individual activity-specific cash intake amounts.
Total incoming: The final intake amount once all the items on the list have been added.
Cash outgoing: This is an itemized list of all your expenses.
Total outgoing: A tally of all your expenses or activity-specific outflows.
Monthly balance: Total incoming minus total outgoing calculated at the end of each month.
Closing cash balance: Subtract total outgoing from opening balance plus total incoming. As you can see, businesses have multiple components, each with its own cash flow profile.
Paying close attention to each component can help you decide which expenses to cut, when necessary, and which cash-rich resources to pursue.