As a business owner and entrepreneur, understanding where and how your money flows in your business is a priority. In this piece, we will help you understand what a cash flow statement is and break down the different sections that make up a cash flow statement. We will also provide examples of how cash flow works in your business, in addition to a few strategies to improve cash flow.
If you want to understand your finances better, let’s learn about cash flow statements so you can make informed decisions and manage your cash resources with confidence!
What Is a Cash Flow Statement?
A cash flow statement is a financial document that shows you information about the cash inflows and outflows of your business over a specific period of time. It is used to evaluate the company’s liquidity and ability to generate cash in order to meet its financial obligations.
Cash flow statements are divided into three different sections:
- Operating activities
- Investing activities
- Financing activities
- Operating activities: This is cash generated or used in the daily operations of the business, such as cash received from customers and money paid to suppliers.
- Investing activities: This is cash generated or used in investing activities, such as buying or selling long-term assets.
- Financing activities: Lastly, this shows the cash generated or used in financing activities, such as issuing or repurchasing stock and paying dividends.
Regularly monitoring and analyzing your cash flow will help you identify areas to improve on and take action to ensure the business’s financial stability.
How Do You Calculate Cash Flow?
To give you an idea of how a cash flow statement is used in a business setting, let’s say you run a small retail store. Your cash flow statement might show that you received $10,000 in sales during the month, but you also had $6,200 in expenses, such as rent, employee salaries, and inventory purchases. This would give you a net cash flow of $3,800 for the month.
You can also use your cash flow statement to identify areas where you can improve cash flow. For example, you notice that you’re spending money on inventory but not selling as much as you’d like. In that case, you should adjust your buying strategy or consider offering promotions to increase sales. Additionally, you can use your cash flow statement to plan for future expenses and ensure you have enough cash to cover them.
The Difference Between Cash Flow and Profit
If you have positive cash flow, it means you’re making income, right? Well, not quite. This is where some business owners might mix up cash flow and profit. Cash flow and profit are often used to measure a business’s financial health, but they are used differently.
Profit is calculated by subtracting expenses from revenue. This shows how well a business performs and whether it can generate enough income to cover its expenses and grow. However, a business can be profitable and still have cash flow problems. Your business may have high profits but may have a lot of outstanding debt or unpaid bills that impact its cash position.
On the other hand, you can have positive cash flow where there is more money coming into the business than going out but still have a negative net income.
With that in mind, cash flow and profit are essential indicators of a business’s financial health, but they measure differently. You should keep track of both metrics to get a complete picture of the business’s financial health.
How To Improve Cash Flow Through Effective Financial Management
Improving cash flow ensures the long-term success of a business. Below are a few strategies to improve cash flow through effective financial management:
- Keep track of expenses: Monitor expenses and find ways to reduce costs without giving up the quality of your products or services.
- Improve how you collect accounts receivable: Implement stricter credit policies and follow up promptly on overdue invoices so you can get paid on time.
- Increase sales and revenue: Find new opportunities to generate revenue and increase the number of sales.
- Improve inventory management: Keep inventory levels low and turn inventory over quickly to avoid cash flow problems.
- Research financing options: You can try applying for a loan or a line of credit to improve cash flow.
- Review regularly: Regularly review and analyze your cash flow statement to identify areas that need improvement and track progress over time.
It’s important to remember that cash flow will always be an ongoing process, and practicing effective financial management should be an ongoing effort for any business.
Achieving Financial Success With The Help of Larry L. Bertsch, CPA & Associates
Are you tired of looking at your business finances and figuring out what’s happening? Well, that’s where we can help! At LLB CPA, our experienced team of advisors is dedicated to providing financial services to businesses of all sizes. From tax services and bookkeeping to accounting and financial planning, with our support, you can focus on growing your business while we take care of the rest, all at an affordable price.
Request a free consultation today to see how we can help with your business accounting and bookkeeping.
