When it comes to the amount of cash thatвЂ™s in your organizationвЂ™s bank account at any given time, you simply canвЂ™t afford to be in the dark about it. Regardless of your revenue, you must ensure that thereвЂ™s enough cash on hand for your organization to be financially solvent and cover critical expenses, including taxes and payroll.
Your cash flow statement reveals how much money your organization had on hand during certain periods of time. These specific financial statements can also help you identify revenue-generating opportunities or troubling issues that need to be addressed.
In this guide, weвЂ™ll give you a better idea of what a cash flow statement is and what it looks like. WeвЂ™ll also break down the different categories within a cash flow statement and many of the line items that appear in each one.
What Is a Cash Flow Statement?
Your cash flow statement outlines how much money you had on hand at the beginning and end of a specific time period, https://paydayloanstennessee.com/cities/dyersburg/ such as a month, quarter, or year. As its name suggests, cash flow statements also specify where incoming money came from and where you spent it.В
In particular, cash flow statements highlight the ebb and flow of money within your organizationвЂ™s operating, investing, and financing activities. If your organization raised funds, sold shares, or earned interest on investments, those activities will be reported in a cash flow statement.
When the net cash from all the three categories is added up, the net cash increase for the reporting period will represent the true gain or loss of cash in your business accounts at the end of a designated reporting period. Meanwhile, the cash at the end of period should represent how much money is actually in your bank account.В
Throughout this guide, weвЂ™ll use the sample cash flow statement below to highlight specific sections and explain how they work:
What is a Cash Flow Statement Used For?
Knowing whether your organization is in the black or moving in the opposite direction can help you plan ahead and make informed financial decisions.В
Since a cash flow statement highlights how money your organization earned and spent on certain activities during a specific period of time, you can easily see which initiatives were either profitable and promising or costly and potentially concerning.
For startups, the biggest concern is often burning through cash too quickly. You certainly donвЂ™t want to find out that your organizationвЂ™s operations are suffering because thereвЂ™s not enough cash on hand.В
If certain initiatives or activities are consistently generating a noticeable loss over several reporting periods, you may want to re-evaluate current business strategies, determine whether theyвЂ™re worth the financial risk, and act quickly to turn the tide. For instance, selling assets, shortening the payment window for customers, and trimming or eliminating expenses on underperforming initiatives can not only generate meaningful revenue but also foster more sustainable business practices.В
Cash flow statements can also help investors or shareholders assess the financial strength of your organization or determine whether debts can be repaid and managed effectively over time. Apart from determining how much money was brought in, your organizationвЂ™s actual cash position can be a signal of strength. Investors can get a read on the performance of your product, based on whether people are throwing money at you and paying up front, as compared to having collection issues.В
How to Read a Cash Flow Statement
As we mentioned earlier, cash flow statements are generally divided into three distinct categories that represent your organizationвЂ™s operating, investing, and financing activities. Within each section, individual line items will outline how much money was generated by specific activities or spent on specific initiatives.В