The third report in the traditional Financial Statements package is the Statement of Cash Flows. In your business you are selling a product or service and receiving money for those products and services. That is the majority of how cash “flows in’ to your business. The expenses you incur to provide these products and services are the majority of how cash “flows out” of your business. This is the CASH FLOW FROM OPERATIONS portion of the Cash Flow Statement. If you look only at this part of your business activity, you may think you have no cash flow issue at all – live is good! Your are taking in more that you spend and there is money in the bank.
As you grow, you may need to buy a piece of equipment specific to your industry, or a vehicle or some other asset. So, now you have to spend a fairly large sum of money in order to grow and make more money. You are making an investment in your future. This cash “flows out” of your business. There is not an “in flow” of cash until you sell the equipment or vehicle for example. This is the CASH FLOW FROM INVESTING portion of the Cash Flow Statement. It is important to remember that this money goes out each month sort of like it is important to remember that part of your paycheck has to go to your mortgage and your car payment!
So, what if you just need some cash for that investment you want to make in the equipment or what if you want to hire an employee because business is booming? There are options. You can apply for a line of credit, sell shares of stock, or put in some of your own personal cash for example. These options are ways to get cash to “flow in” to the business. Of course, don’t forget the interest expense for loans, and dividend payments for stock holders if applicable.
You can think of the CASH FLOWS FROM OPERATIONS as being similar to the Income Statement. The focus is on the monthly activities or short term. In your personal life, you don’t want to forget to budget for the mortgage or car payment. Similarly in your business, you don’t want to forget to budget for the investments you make in your business.