The cash flow statement answers the question: “Where did all my cash go?” for management. It shows the movement of cash and cash equivalents over a specified period of time. It highlights opportunities to improve cash flow. 

The statement of cash flows helps the company’s lenders and creditors determine how much cash is available (referred to as liquidity) for the company to finance its operating expenses and pay down its debts. It also means investors can make better, more informed decisions about their investments.

It does not show expenses, revenue, or how much cash you will have next month.

Here are the sections of the cash flow statement:

Cash flow from operations

Lists cash receipts from sales, cash expenses, rent payments, salaries paid to employees, payments to vendors, transaction fees, inventory purchases, etc.. It can consider changes in accounts receivable balances from customers paying their bills (or not) or accounts payable if you delay paying a supplier or pay down a balance. Cash flows from operating activities are all to do with ongoing, day to day transactions that occur within the period of the statement. Sometimes this is abbreviated as CFO (Cash From Operations) but that’s the same as chief financial officer, so we prefer operating cash flow OCF.

Cash flow from investment

This type of cash transaction is about long term assets and liabilities. The name is slightly confusing as it might make you think of personal investments in stocks and bonds – instead, think of it as the company using cash to make investments in assets that will hopefully pay off down the road. This can include purchases or sales of equipment 

Cash from Financing

This type of cash considers cash coming from or going to investors and banks. It can included paying down debt, taking on new debt, buying back stock, issuing new stock, paying dividends, etc.

There are famously two methods for creating a cash flow statement: 1) the direct method and 2) the indirect method. The direct method simply tallies all the cash inflows and outflows over a period of time. The indirect method starts with Net Income and backs out all the non-cash transactions. An easy way to understand the indirect method is if you consider a company that sold its last inventory of widgets for $10,000 that it bought last year for $1,000. The income statement for this month would show $9,000 (revenue minus cost of goods sold), whereas the change in cash would be $10,000. So to get from Net Income to the change in cash you just add back the COGS since you didn’t spend cash on inventory in this period. Similarly depreciation and amortization are non-cash expenses that reduce net income and they need to be added back in order to arrive at the cash impact.

Here is an example of a cash flow statement for a small technology company that offers an event planning app and furniture rentals. It is not necessary to build your own as these can be easily viewed in your accounting software (such as QuickBooks Online or Xero) or provided by your accountant.

In this example we can see that there was $11,950 of net income. The company collected $454 of accounts receivable, they made cash payments on $510 of inventory, racked up $2831 more on their credit card etc … all changes to operating accounts that didn’t affect cash so are added back. Then they spent cash on some equipment for $2750. Next they took out a loan (note payable) for $21,608 and the owner put in an additional $12,750.

Since many people are highly visual, it is sometimes useful to chart cash flows visually. This chart clearly shows where all the cash went. Image courtesy of our friends at Fathom:

This chart uses some other definitions which are useful.

• Operating Cash Flow: The amount of cash generated by normal business operation. Indication of the ability/inability to maintain capital
• Free Cash Flow: is Operating Cash Flow minus Cash Flow from Investing Activities. Indication of cash available after operations and asset management. This turns out to be very important for valuation and investor decision making as it reflects the ability of the company to repay disburse cash back to investors.

Net Cash Flow: net change in cash over a period of time

Ask your Accountant about Cash Flow

Entreflow has a Vancouver Accountant office and a Toronto Accountant office. We work virtually with startups and small businesses across Canada. Contact us to get help understanding how cash flows through your business and how you can use it to power growth – without wasting a drop.

The Cash Flow Statement tells you only about what has happened and is not useful for predicting what will happen to cash in the future. Startups often use terms like cash ‘burn-rate’ and ‘runway’ to get a broad sense of how long their current cash will last. For a more nuanced understanding, read more about Cash Flow Forecasting and Cash Management.