As the saying goes, “Cash is King!” How much cash does your business have right now? Where did all the cash go? To answer those questions, it helps to know how to read the Cash Flow Statement. If you’ve ever wondered what the heck a Cash Flow Statement is and how to read it, then this week’s post is for you!
Previously (4 Financial Reports You Need to Crush Your Goals), we discussed how important it is that you use financial reports as a roadmap for your business. This week, we’re going to take a deep dive into the Cash Flow Statement. Personally, I have found this report the hardest to explain to business owners. When you’ve had a killer month with your sales but very little cash in the bank to show for it, though, this is exactly the report you need. I want you to know how to use the Cash Flow Statement to answer your questions and weather those cash crunches that every business faces. Ready? Here we go!
What does a Cash Flow Statement tell you? The Cash Flow Statement shows the money flowing into and out of your business. This flow of cash is crucial to keeping your business running, so you can pay your bills and your subcontractors even as you’re waiting for your clients to pay you. Knowing when your cash will be tight will help you make better business decisions and avoid having to choose between which bills to pay on time and which will have to be paid late.
We’ll go through the Cash Flow Statement screenshot below for Craig’s Design and Landscaping Services to help you understand what this report can tell you. (Did you know that you can test drive QBO?? Comment below if you’d like the link for this sample company account!)
Under Operating Activities, the Net Income figure tells you how much money your business made from normal operations. This number comes from your Profit & Loss Report and is the total of your sales minus your expenses for the time period. For Craig’s the Net Income for his year-to-date is $1,642.46.
Adjustments to reconcile Net Income sounds pretty confusing, right? This is probably the hardest part of the report for many people to understand. Basically, there are some things that you may have done that will not show up on your Profit & Loss Report, but that reduce the amount of cash you have on hand. If you paid down your credit card balance, for example, that payment does not show up on your Profit & Loss Report, but it definitely reduced the amount of cash you have in the bank. So, you will see that reduction here on the Cash Flow Statement.
For Craig’s, there were three major adjustments. First of all, Accounts Receivable increased by $5,281.52. This means that sales were made (yeah!), but the clients haven’t paid yet. As Craig’s is still waiting for that cash, it shows as a $5,281.52 reduction in cash available. To cover his bills, it looks like Craig took out a small loan of $4,000. The loan gave him more cash to work with, so it shows as an increase in cash available. Craig also added to the pile of vendor bills he was waiting to pay, as his Accounts Payable increased by $1,602.67. Since the Accounts Payable represent bills that he hasn’t paid yet, that shows as an increase in cash available. As I said, this section can be a little confusing, but taking it line-by-line helps to tell the story of where the cash came from … and where it went!
Investing Activities will show the purchase of any new assets you’ve recently bought. Did you get a new laptop last month? The cost of that laptop will probably show up here. And since they didn’t give you that shiny new laptop for free, the amount you paid will be shown as a “use” of your cash. At Craig’s, it looks like a new truck was purchased for $13,495.00.
Financing Activities will show the amount you paid back on installment loans or lines of credit. If you used some of your cash to pay down a loan, that “use” will be listed under Financing Activities. It looks like Craig took out a $25,000 loan, however, so that actually increased his cash on hand. This must be where he got the cash to pay for that new truck!
When you’ve closed a bunch of deals and had a great sales month, you expect to have a pile of cash to show for it. Some of that cash may have been used to pay off credit cards, buy new equipment or settle up with vendors. Some of your new clients may still owe you money! Using the Cash Flow Statement will explain where your cash went and help you manage the ups and downs of cash in your business.
Last, but certainly not least, you want to make these reports a part of your monthly routine. Each month, close out your books, reconcile your accounts and run your Cash Flow Statement. Use this report as a report card for your business to see how well you’re doing in keeping enough cash in the bank to keep your business running.
Now you know how to read a Cash Flow Statement! Pat yourself on the back with the knowledge that you’re now ready to steer your small business towards better profitability and the next level of business growth. Congratulations!
Have a question on how to read your Cash Flow Statement? Leave a question below.
Deb Howard Greenleaf, EA, CEO and Principal, of Greenleaf Accounting Services provides virtual accounting and bookkeeping services and specializes in financial management to consultants, coaches, solo professionals, and other small business owners across the US. Deb is an Enrolled Agent (EA)—an IRS-licensed tax professional—and specializes in small businesses and entrepreneurs filing Schedule C or as an LLC. As an Advanced Certified QuickBooks ProAdvisor, Deb spends her day in QuickBooks Online and specializes in providing QBO support.