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The Statement of Cash Flows

Of the 3 financial statements…the Statement of Cash Flows may get the most popularity.

And it’s for good reason…

your cash flows is your oxygen tank.

Even with the best margins in the world, if your cash flows are poor…it can mean trouble.

Today, we’re going to do a deep dive on this statement so that you can manage your cash flows like a pro

What is the Statement of Cash Flows?

The Statement of Cash most things in Finance and Accounting…is what it sounds like

It showcases the movements in your cash from one period to another.

For example, you may see on your Balance Sheet that your cash went down by $200k this month…

but do you know why?

Do you know where that money went, and how that differed from what’s shown on your Profit & Loss?

That’s the whole job of the Statement of Cash Flows

What are the Sections in the Statement of Cash Flows?

The Statement of Cash Flows is separate by 3 sections:

What are the Sections in the Statement of Cash Flows?

Let’s do a quick summary of each:

Cash from Operating Activities

This refers to all cash movements from activities that relate to operating your business.

Cash from Investing Activities

This refers to the cash movements from activities that the business invested in…most commonly related to Fixed & Intangible Assets.

It can also be related to long term investments, like bonds.

Note however that if someone invests in your company, that is NOT an investing activity…

instead, it would show up on your Financing Activities.

Cash from Financing Activities

These are all of the cash movements related to activities that contributed to financing your company…

Whether that be in the form of debt, or equity

What are the 2 Method for Preparing a Statement of Cash Flows?

Your Statement of Cash Flows can be prepared in 1 of 2 methods..

The DIRECT method…or the INDIRECT method.

Let’s do a quick review of each:

2 Method for Preparing a Statement of Cash Flows?

The Direct method

This method is really easy to understand, even for someone who doesn’t have a Finance & Accounting background.

It presents your cash flows utilizing terminology like:

  • Cash received from customers

  • Cash paid to suppliers

  • Cash paid to employees

Although this method is easier to digest…it’s also much much harder to produce.

The reason for that is that you can’t just rely on the information on your Income Statement or Balance Sheet…

You have to pull many more reports, making it challenging to prepare & update on a regular basis

The Indirect Method

This method is MUCH much easier to produce…

The idea is simple - you just take the difference in all of your Balance Sheet accounts, other than Cash.

Since your Balance Sheet must always tie, your cash in essence becomes your plug.

This is a bit of a simplification of how the statement is prepared, but the idea is that you’ll present the statement using each balance sheet account, and showing if it increased or decrease.

Although it’s much simpler to prepare…as you can imagine, it’s not as intuitive to understand.

Despite this challenge, this is the most popular way that companies prepare a statement of cash flows

Net Income Does not Equal Cash Flows

This is a really key point to drive home…

your cash flows are not the same as your profits.

This is especially relevant with accrual accounting…

but even those companies that prepare their financials utilizing the cash basis can see large differences between their net income, and their cash flows

 The Statement of Cash Flows - Net income VS cash flow

There’s a ton more to share about the Statement of Cash Flows… such as:

  • How to prepare one from start to finish

  • Ratios to look for with the statement of Cash Flows

We’ll get into those in future editions.


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