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What is Your Cash Flow Statement Telling You?

Posted by Dan Prendergast on Jan 16, 2014 9:25:00 AM

Understanding your cash flows is critical in running a business. Just like I know that understanding your Cash-Flow-Statementmileage log is critical in running for a big race. As a runner, I know the miles that I need to run each day and how often I need to run in order to prepare for my next successful race. As a business owner, do you know how much cash you need to run your business or how much cash you need to prepare for your next successful year? The cash flow statement is a very powerful tool in determining your financial stability of your business and to determine future needs.  It also compliments the income statement by reconciling your net income to your net cash.  

The statement of cash flows is one of the required financial statements. It classifies cash receipts and cash payments into three categories (operating, investing, and financing).  Separate disclosure of noncash investing and financing activities is also required.  

Operating Activities

Operating net cash flows is an important measurement because it indicates how much cash your business generates from operations. Businesses commonly use the direct and indirect method for reporting the operating activities. Regardless of the method, the amount of cash flows from operating activities is the same. The operating activities include the cash receipts from the sales of goods and services and cash payments to suppliers and employees for inventory and expenses. Users of the statements, such as investors, lenders, and other external parties, look closely on these activities to assess the ability of the business to generate positive cash flows and its financial health. Users can use the operating cash flow statements from several periods to determine a trend in cash. A positive trend can indicate financial health, whereas a declining trend can indicate a weakness.  

Using my running analogy, operating activities is comparable to how well you are performing in a training plan. Are you putting in enough miles and effort to have a successful race? A business owner should question how well their operations are performing in a certain period?    

Investing Activities

Investing net cash flows is an important measurement because it indicates how much cash you are using to grow your business and planning for long-term.  The investing activities commonly include purchasing of long-term assets, making and collecting loans, and purchasing and disposing of investments. Users look closely on this to see how much cash you are using to expand your business. As a runner, am I investing in the tools that I need to produce results?  Keeping the same running shoes for years will not help me out and will probably result in having to take time off due to injury. What happens if you do not invest for the equipment needed to run your business? Can you afford for your production to be stopped or be postponed?   

Financing Activities

Financing net cash flows is an important measurement because it indicates your ability to repay debts and how much return you are providing your investors. The financing activities commonly include the liability and equity items such as cash amounts obtained from creditors and repayment of the amounts borrowed, cash amounts obtained from owners and a return on their investment.  Users look closely on this to assess the ability of the business to meet obligations to repay loans and pay dividends. As a runner, am I meeting my goals? Have I committed to a running a marathon?  Did I postpone this race?  As a business owner, did you obtain financing by committing to certain terms?  Did you pay down your debt or did you have to obtain additional financing? 

How well do you know your cash activities in your business? 

Business owners should start, if not doing so already, use your cash flow statements for internal planning.   You can estimate your cash flows based on current and historical cash flow trends that can identify and avoid potential funding shortfalls. Just like runners use their mileage log to train for races and achieve their personal record.  If I fall short on my race time, I will look back at my running trend to identify what I did wrong and how I can improve for the next race. If a business owner falls short on their cash, they can look back at the year and identify what went wrong and how they can improve for the next year.


Speak with a Meaden & Moore expert today to discover ways to improve your business.

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Topics: Small Business, Accounting & Auditing

Dan Prendergast

Dan Prendergast

Dan Prendergast is a Vice President at Meaden & Moore. He offers over two decades of experience working with closely held and entrepreneurial companies.