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Cash Flow Statements: A Guide for New Entrepreneurs

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In addition to being an essential part of developing your business plan and preparing to pitch investors, the Cash Flow Statement is possibly the most important financial statement that you’ll need to understand when making business decisions.

What is a Cash Flow Statement?

Simply put, a cashflow statement shows the cash entering and leaving your company. 

Cash flow statements are historical financial documents that record the cash and cash equivalents entering and leaving your company over a specific period in the past, typically a fiscal quarter or year. They provide insights into your company’s historical liquidity and its ability to generate cash to meet its short-term obligations.

However, while cash flow statements themselves are based on historical data, they are invaluable for making future projections and forecasts. By analysing the trends and patterns in a cash flow statement, entrepreneurs and financial analysts can predict future cash flows, anticipate potential financial challenges, and make informed business decisions to ensure the company’s financial stability and growth.

Why is Understanding Cash Flow So Important?

Think of cashflow this way. Depending on your type of business, you won’t always get paid at the time you deliver your product or service. 

If you’re a dog walker who walks a dog on 30 July, and you make your invoice for your customer on this day, it’ll appear in your P&L statement for July (as income).

Now, let’s also say you have bills due on 31 July.

But if your customer doesn’t pay you until, say, the 5th August, the cash ‘inflow’ won’t hit your bank account until after the bills due on 31 July should have been paid. 

July’s income statement might show a profit ‘on paper’, but it doesn’t mean you received any cash or paid your bills on time. This is how ‘profitable’ businesses go bust.

Cashflow is absolute king. Money in, money out. Don’t let it run out. 

Key Components of a Cash Flow Statement:

• Operating Activities: Cash generated or used in the core business operations.

  - *Receipts from Customers*: Cash received from sales.

  - *Payments to Suppliers and Employees*: Cash paid for goods, services, and employee wages.

• Investing Activities: Cash used for acquiring or selling long-term assets.

  - *Purchases of Property and Equipment*: Cash used to acquire fixed assets.

  - *Proceeds from Sale of Assets*: Cash received from selling assets.

• Financing Activities: Cash transactions with the company’s owners and creditors.

  - *Proceeds from Loans*: Cash received from taking out loans.

  - *Repayments of Loans*: Cash paid to settle debts.

How to Read a Cash Flow Statement

Interpreting a cash flow statement is straightforward with the following approach:

• Review Operating Activities: Positive cash flow from operating activities indicates that the business is generating sufficient cash from its core operations.

• Assess Investing Activities: Examine the investment in long-term assets, which is crucial for growth but can strain short-term liquidity.

• Evaluate Financing Activities: Understand how the business is funded and how debts are being managed.

Linking Cash Flow Statements with Business Plans

A cash flow statement is one of your company financial statements, along with your P&L and balance sheet that enhances your business plan by offering a real-world evaluation of your financial strategy. 

When developing your business plan:

• Integrate [Financial Forecasts](https://rauva.com/blog/small-business-financial-projections-step-by-step-guide): Incorporate insights from the cash flow statement to project future cash flows and validate the financial feasibility of your business model.

• Showcase Financial Stability: Present your cash flow statement to potential investors to illustrate the liquidity and financial health of your business.

• Informed Strategic Planning: Use the data from the cash flow statement for informed financial planning and setting achievable goals.

Conclusion

While profit can seem to be the logical financial goal for business owners, a profitable company can still run out of cash. 

Factors which affect your cash flow: -

• Increasing your inventory. Spending all your money on stock means you have lots to sell, but if your bills or payroll become due before you’ve sold the stock, you can’t pay your bills or your payroll.
• Increasing your accounts receivable - meaning having a list of clients or customers who owe you money, but haven’t yet paid you. You can’t pay your bills or payroll with IOUs from customers. 
• Decreasing your accounts payable - meaning paying off your bills and debts. If you spend all your money on paying off your liabilities and you have no stock, you can’t buy any more stock to sell to continue trading.

Managing cash flow is juggling. You need your payments from customers and clients to come in before you can make payments out. This takes practice, or ideally, expertise, and for budding entrepreneurs, understanding cash flow statements is essential in learning how to run your business’ finances.

In addition, your cash flow statement complements your business plan, guides strategic decisions, attracts investments, and ensures the financial well-being of your venture, so if in doubt, make sure to get some professional advice - it’s one document you need to use frequently and get right! 

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