• What do you focus on when you look at cash in your business? Do you know your business's cash cycle? 
• Did you know to understand your cash better you can use a cash flow statement? You can access them from your accounting software program or ask your accountant!
• Here are some important professional tips to improve your cash position using cash flow statements!​

Cash is king of the business world, right? So why do accountants talk about profit all the time? This may be due to income tax calculations being based on profit.

But as a business owner, you need not forget about the most important resource- CASH! Therefore today, I’m going to highlight an awesome report to add to your financial reporting repertoire. And it is actually one of the most straight-forward and understandable reports for business owners.

Warren Buffet, one of the world’s greatest investors also focuses on cash flow. He knows that without enough cash, even a profitable business is not on solid ground (and therefore not worth investing in from his perspective.)

Also, research shows that business cash flow tends to move in roughly 3-month cycles depending on payment cycles based on quarterly tax payments and superannuation requirements (in Australia). So it’s time to check out what you can do to better understand cash flow and your cash cycle in your business.

How do you know if you’re in a good cash position?

Many businesses check their bank balance regularly, but sometimes, that’s just not enough. Let me explain the starting point of knowing if you’re business is keeping track of its cash well enough for your business not only survive but thrive!

Why focus on cash and cash flow reports? 

The importance of cash in a business is quite evident, without available cash you have limited choices around what you can sell, how you can advertise, who you can hire or even what you can spend money on. But the benefits of understanding your cash flow statement or even where to find it aren't as clear. So, I’m here to explain.

What is a cash flow statement?

A cash flow statement is essentially the summary of cash coming in and going out in your business broken into different categories. These categories are operations, financing and investing. Cash flow statements are generally produced by accounting software programs.

Unlike a profit and loss statement or income statement, you don’t need to know an amazing amount of accounting or accrual rules and regulations to produce it. Accrual accounting (generally used in the profit and loss statement) is all about recording the transactions in your business books when the transaction occurs, not when the cash is received. So, there is a TIMING difference that can make or break your business.

For example, you may sign a contract and record a large sale one month, but not actually receive the cash till 90 days later when payment is due. If you are not accounting for this timing difference, then you may have insufficient cash to pay bills in the interim. This is a vital reason why cash flow needs to be a focus in your business.

Let's break down cash flow statements into bitesize chunks... 

Example of a cash flow statement 

Below is an example of the format of a cash flow statement:

The 3 categories of a cash flow statement 

Cash flow statements are broken down into three categories. Why? Because it shows where the business is spending and generating its money and on what types of activities.

1. Cash flow from operations

This is money that has been received and spent in core business activities. This means that the impact of any non-cash items such as accounts receivable or depreciation are excluded. This figure will show you if the main operational activities are creating positive or negative cash flow.

Why is this category so important?

In some instances, when non-cash items are removed the normal operations of a business can be very cash consuming or it indicates a delay in receiving money owed to you.

If there is negative cash flow here, it means that the core business activities during that period cost more than the money that was brought in.

It’s difficult to comment on the health of the business by looking at only one period or timeframe. Consider the example above, the green circle is showing that the net cash flow from operating activities in the more current period is LESS than the period before. This could be due to a large invoice from a customer that is overdue or that a large bill from a supplier was just paid.

If net cash flow from operating activities is regularly negative, then this is a red flag to investigate accounts payable and accounts receivable policies further.

2. Cash Flow from Investing

Cash spent on property, plant and equipment is recorded here. There may be a machinery or vehicles purchased or equipment sold.

Why is this important?

This section shows you that if there was a large cash decrease overall it may be from investing in better machinery or equipment. And this does not necessarily indicate any issues with a business. It actually indicates there may be an investment in the future efficiencies and growth.

3. Cash Flow from Financing

Loan repayments, money invested or withdrawn from the business owner and proceeds from loans are captured here. In the example above, check out the difference from one year to the next. There is a large difference in going from $40k withdrawn to $70k. In this instance, the owner has taken a larger amount of cash from the business (not necessarily a bad thing, hey?) But it is important to understand what the change is. If there was a large increase in cash here, you may find that there has been a loan granted to the business. This is a good injection of cash but may indicate more money going out of the business as that loan is repaid.

Pro-tips to improve your cash position!

Use the cash flow report to assess the financial health of your business on a monthly basis. It’s easy to read and provides immeasurable clarity of your cash position.

Tip 1: If most of your cash inflow is from investing or financing activities, something is not quite right. Most of your cash inflow over numerous periods should be from your core operational activities. Refer back to the green circle in the example.

Tip 2: Financing activities are important for business growth, but they shouldn’t exceed cash flow from operations. What I mean by this is, when you look at repaying loans or drawing funds as the business owner it should always be compared to the net cash inflow from operations.

Tip 3: Remember it is important to track your sales revenue, but it is just as important to track your cash held by the business. Without cash, you cannot pay bills!

Cash flow statements truly are one of the most useful tools for your financial toolkit! Invest some time today checking yours out and reap the benefits for years to come.

Editor's Update

We hope this article has helped you understand more about cash flow statements for your business. They can be tricky, so if you still have questions or want to learn more, make sure you head to our Accounting group where you can connect with business accounting experts and other businesses.