How To Understand Cash Flow … We Break It Down In Easy To Understand Language

Posted on August 12, 2016 by Denáe Hough

Our money Lioness Denáe is breaking down how to understand cash flow over a cup of coffee. Grab yours, and get the details below.

laptop-1478822_640How do you take your coffee, cup of joe, or mud? Do you prefer a Flat White, Espresso, or Americano? Call it what you want and brew it how you like, coffee, for many of us, is an integral part of daily life. But as entrepreneurs, what is an integral part of our business daily life? CASHFLOWS! Cash is the heartbeat of business. As such, we must understand how cash is moving through our business. We can understand cash movement better through a Statement of Cash Flows. But what really is a Statement of Cash Flows (C/F)? How can a C/F statement aid in running a more effective business? Well, Lionesses, let’s chat about cash flows over coffee. Grab your coffee…

A cash flow statement is a component of a complete set of financial statements for a business:

  1. Statement of Financial Position (balance sheet),
  2. Statement of Earnings (the income statement),
  3. Statement of Comprehensive Income,
  4. Statement of Cash Flows
  5. Statement of Changes in Owner’s equity.

Of the financial statements, cash flows focus on providing information about the flows of cash in and out of the business. The statement of cash flows highlights the sources of cash and the uses of cash. A C/F statement is divided into three (3) sections: Operating, Investing, and Financing.

Quick sip of your frappé …  the operating section displays information from the operational aspect of your enterprise. In other words, the ins of cash from customers, interest & dividends received, sale of current assets, or other cash that enters the business. The statement further displays the outs of cash related to operating activities.  Outs of cash typically arise from payments to suppliers & employees, interest paid, taxes paid, purchase of current assets and other cash that leaves the business. The operating section should not be mistaken for the Income Statement. The Income Statement is key to determining if a firm is profitable. A Statement of Cash Flow is key to determining the sources of cash and how those sources are put to use within the firm.

Investing is the next section of the C/F.  This section explains the movement of cash from the purchase or sale of non-current assets. As you savor your medium roast blend, let’s brew on this topic a little more. Investing activities include acquiring or disposing of plant, property, or equipment. Purchasing or selling trading securities is another type of investing activity. Lastly, making loans to other businesses or even acquiring other entities are types of investments that are presented under the investment section of the C/F Statement.

The final section of the C/F presents to the end-users the movement of cash as it pertains to financing. Financing consists of owner-oriented and creditor-oriented activities.  Owner transactions are cash flows into the firm from the owners or cash flows out of the firm to the owners. For example, issuing stock to owners is an inflow and paying dividends to owners is an outflow. Owner transactions are also referred to as equity transactions.  If your firm borrows money or makes payments of principal on debt, then these transactions are considered creditor-oriented activities. Debt transactions are generally considered creditor- oriented activities.

As entrepreneurs, it is important to know and understand the sources and uses of business cash; the Statement of Cash Flows is priceless.  This statement provides critical information used in the decision making process. Should you purchase equipment now or later? Based on your inflows from customers, do you need to tighten up on your credit policy?  Should you consider other alternatives to speed up collections, like electronic drafts or lock boxes. How much cash enters the firm from borrowed funds versus from owner contributions? Why is cash increasing or decreasing?  Statement of Cash Flows should be produced on a monthly, quarterly, and annual basis.

Big gulp of your dirty chai latté, Lionesses!  You have now had your coffee and cash flows. Remember, with enough coffee, anything is possible- especially when it comes to understanding your financials!

Please contact an accountant or CPA to help you gain a deeper understanding of your particular business financial statements.

Hope your business blings in the year 2016!

About Denáe Hough

Denáe Hough, CPA, CPB, MBA, is a certified public accountant, certified public bookkeeper, master of business administration and certified QuickBooks ProAdvisor. Hough is the owner of The Financial Boutique, LLC in Houston, Texas. The Financial Boutique specializes in providing technical, highly specialized and tailored services in the areas of accounting (bookkeeping, accounting, payroll, financial planning) and taxation (tax preparation & filing, IRS representation, tax consulting) to a micro-niche clientele of women and small business owners. The Financial Boutique also offers financial classes and presentations.

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