While your income statement and balance sheet are important indicators of health, equally important is your cash flow statement. Cash is what keeps your business functioning.
- Your balance sheet is a “snapshot of your financial condition” as of a point in time.
- Your income statement measures profit or loss for a period of time – revenues less cost of goods sold, less operating expenses.
- Your cash flow statement measures how changes in your balance sheet accounts and profit or loss for a period of time impact your cash.
What is often difficult to understand is that you may be profitable and still have a negative cash flow. This can result from using cash for things that do not show up on your income statement such as:
- Repayment of principal on debt
- Increasing inventory
- Decreasing your vendor payables
- Purchasing of store fixtures
- Payment of owners draws
A cash flow statement has three main categories that reflect where cash is generated from or used in the following activities:
Operating activities will include day-to-day operating results. Increases and decreases in payables and cash from the net profit or loss of the business are presented here. Pay particular attention to this section of your cash flow statement. It is the real indicator of your financial health.
Investing activities will include buying store fixtures and store build out activities.
Financing activities will include the new borrowings and repayment of loans.
Banks and investors will pay particular attention to your cash flow statement to understand your ability to repay debt. If you are not using a cash flow statement in your business, consider doing so. Then ask your accountant to explain your business results not only through your balance sheet and income statement but also your cash flow statement.
For additional questions, please contact Jim Stelten at 612-805-3159 or firstname.lastname@example.org.
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