• Lela Countryman

Understanding Your Statement of Cash Flows: Operating, Investing, and Financing

Updated: Jan 28

This is the third post in a series on understanding your financial statements. I have talked about the balance sheet and the income statement. Today I will talk about the statement of cash flows. Then I will end this series on how to analyze all three financial statements together to get an understanding and clear picture of your business finances.

The statement of cash flows reports how cash was generated and used during a specific period. It is the least analyzed of the three financial statements however it complements the balance sheet and income statement to get a clear financial picture of your business. The statement of cash flows is important to see your cash position as it reflects the flowing in and out of cash and is a great measure of profitability and long-term sustainability of your business.

The statement of cash flows is categorized by the following categories: Operating activities, investing activities, and financing activities. Below is the description of each activity and the accounts that are included in that activity.

Operating Activities

The operating activities includes any cash generated or used for key business operations. This will include revenue/sales and expenses from business operations. The revenues reported on the income statement may not have been collected since the accrual basis of accounting records revenue at the time it is earned, not when it is received so it is important to keep this in mind when comparing income and cash coming in.

Accounts that will be included in this activity will be cash payments from customers, cash from supplier refunds, expenses paid as part of business operations. It does not include interest income or expenses, dividend, and interest income as these are not considered activities from operating your core business.

Investing Activities

The investing activities reports the cash purchase and sale of long-term investments and property, plant, and equipment. The following accounts show what cash is used to make up the investing activities: Long-term Investments, Land, Buildings, Furniture, Vehicles, and Equipment.

Financing Activities

The financing activities reports the issuance and repurchase of the company’s own bonds and stock and the payment of dividends. The following accounts make up the financing activities: Retained Earnings, Preferred Stock, Common Stock, Notes Payable (generally due after one year), Bonds Payable, and

Deferred Income Taxes.

Why is the Statement of Cash Flows Important?

The statement of cash flows is important to understand because it reflects your cash position of your business. It gives you more information about where your cash is going and allows for managing of your future cash coming in and going out. Analyzing your statement of cash flows can also help you in your short- and long-term planning because you will have a clear picture of your cash position and what changes need to be made.

Remember the cash position of your business can reflect your profitability or overall success of your business. If your business is consistently generating more cash than you are using, you are in a great position to be able to reduce your debt, acquire more assets, or further invest in your business. It is important to remember that positive numbers on the statement of cash flows are considered good for your cash balance.

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