How to Read Your Cash Flow Statement

The Statement of Changes in Financial Position is what a Cash Flow Statement may be referred to as. Previously, it has also been referred to as Source and Use of Funds Statement.

If you’re curious why your income statement shows your business is making a profit but you are always short on cash, the cashflow statement will reveal where your cash is going.

  • To see what your business owns and owes, the balance sheet will detail this.
  • Your cash flow isn’t reflected on the income statement even though net income is calculated on it.
  • To see the cash flowing in and out of your business, the cashflow statement would provide you these details.

It is a good idea to refresh your memory on the concept that net income is not to be confused with cash flow.

It will help to print off your balance sheet showing the current period compared to a previous period, if the numbers are personal which relate to your business.

When looking on your comparative balance sheet, you should see a subtotal for all of your cash accounts. If you only have one bank account and no petty cash, then this account represents your cash.

You will see the difference in the cash balance from your previous period which will show the net increase or decrease in cash is what the cashflow statement analyzes. To do this, we will calculate the changes to your asset, liability and owner’s equity accounts in terms of inflows (sources) and outflows (uses) of cash and exchanges.

To keep things simple, we’ll just review the cash flow statement that QuickBooks produces.

The QuickBooks cash flow statement is broken into three parts:

  1. Operating Activities – modifies your net income for non-cash items such as depreciation/amortization, gain/loss on sale of assets and by analyzing the variances in your current assets and current liabilities, which is also referred to as working capital.
  2. Investing Activities – examines the changes in your long-term asset accounts which translates to the purchase and sale of capital assets and investments.
  3. Financing Activities – examines the changes in your long-term liability and equity accounts which converts to the issuance or retirement of stock, getting a bank loan, paying dividends (if you are incorporated) or paying down debt.

Here is how you can use this statement in your business:

Try to find the items listed below by printing out your QuickBooks Cash Flow Statement.

  1. Under operating activities, find your non-cash item depreciation that was booked on your income statement. Did you purchase any inventory? Prepay rent or insurance? It should show up here.
  2. Under investing activities, shows if you bought or sold any equipment, office furniture, or vehicles.
  3. Under financing activities, shows if you paid any debt down on an existing bank loan or invested some money into the business.

To find out how you did – for example, if you know that you bought some equipment (investing activity) and financed it with a bank loan (financing activity) during the time-frame you are looking at, and that doesn’t show up in the appropriate section, this should alert you. You now know you have a bookkeeping error you need to track down and correct.

This statement is showing how much cash came into the business and how you used the cash in business. Did you have any other substantial cash transactions occur during the period that you want to verify they are showing up correctly on your cash flow statement? Take the time to figure out where they should be showing up on the statement. If something isn’t showing up where you expected it to, this should trigger your attention.

How will the bank use this statement?

Typically, your banker will equate your net income to your operating activities. The banker is going to look extra closely to determine why you aren’t turning your profit into cash, if your business is constantly producing less cash than your net income. The banker wants to know that you will have the cash to pay back any loans granted.

Ask your bookkeeper to provide you with a cash flow statement. The cash flow statement is very helpful once you learn how to use it.

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