To be successful in business, you have to know your numbers. That especially is true in managing cash flow. Cash flow is simply the flow of money into and out of a business. It is essential for daily business operations, purchasing inventory, paying employees, covering operating costs, and paying taxes. With positive cash flow, a company can meet its obligations, reinvest in its business, settle debts, return money to shareholders, and prepare for future financial challenges. For a business to be successful in the long term, it must operate with positive cash flow and generate profits. Managing cash flow requires a smart and consistent review of the cash flow statement.

Why The Cash Flow Statement is Important for Small Businesses 

Business managers use the cash flow statement to understand how a business is doing. It provides a measure of financial predictability by showing where the company stands at a point in time. Effective use of the cash flow statement contributes to a more stable business so the business can pay its expenses on time, thus avoiding late fees and supplier problems. It helps a business grow by showing the funds available for hiring new employees, purchasing additional inventory, and upgrading equipment. It also allows a company to be flexible and potentially seize opportunities to improve its business. 

Business Financial Statements 

An organization’s financial statements are important documents to report its business activities and financial performance. There are four primary financial statements: the income statement, the balance sheet, the cash flow statement, and the statement of retained earnings. Each has an important role to play in the effective financial management of a company.       

How to Interpret Your Cash Flow Statement 

A cash flow statement is typically divided into three sections: operating activities, financing activities, and investing activities.  

1.Operating Activities.

The operating activities section shows cash flows from the company’s primary business activities, including revenues generated, expenses made, and changes to working capital. Key questions to be addressed include whether net cash is positive or negative, how it compares to prior periods, whether the cash flows from operations are sustainable, and whether there are indicators of any improvements or deteriorations in cash generation. 

2. Financing Activities.

The financing activities section shows cash flows related to the company’s capital structure, including equity, debt, dividends, and share repurchases. Key questions to be addressed include whether the cash flow from operations covers debt service obligations and whether there are any upcoming maturities that will impact cash flow. 

3. Investing Activities.

The investing activities section shows cash flows from investments. Key questions to be addressed include whether there are consistent investments in fixed assets to support the company’s planned growth. 

When analyzing all financial statements, it is important to compare multiple time periods to look for trends. Most critically, the information inputted into the statements must be reliable to be reliable indicators of action.    

Seek Professional Accounting Assistance 

Contact Irongate Business Partners, based in Charleston, serving small South Carolina businesses. We provide bookkeeping, financial analysis, and outsourced accounting services. Some of our major client categories include construction companies, restaurants, HVAC and home services companies, and medical practitioners. Our aim is to empower growing small businesses with accounting and financial insights and services that otherwise might be out of reach.