Corner Office

Corner Office - Available Now

San Francisco
(Financial District), CA

100 Pine Street Suite 1250
San Francisco, CA 94111

by Townes Haas
6/28/2016 10:53:35 AM

Here’s how cash flow works

The inflow and outflow of cash into and out of a business reflects the health of that operation. That’s why it’s important as a small business owner to be able to read and understand a fundamental financial document called a cash flow statement, or statement of cash flows. This instrument is used to track the flow of working capital into and out of a business during a given accounting period. While the income statement and balance sheet are helpful for understanding the financial standing of your small business, they do not take into account the complexity of cash flow over time. It’s also important to note here that cash flow analysis can result in actionable intelligence that can allow you to make large or small adjustments to day-to-day operations to improve efficiencies or help you better decide when it’s time to bring in investors to help you grow. Cash flow analysis is critical for small businesses and should be evaluated at least quarterly, if not more often.

Cash is generated by a business via:

  • Sales of your product or service

  • Loan or credit card proceeds

  • Asset sales

  • Owner investments

Cash flows back out of a business through:

  • Standard business expenditures

  • Loan or credit card principal payments

  • Asset purchases

  • Owner withdrawals

  • Operating, which covers sales and business expenditures

  • Investing, which covers asset sales and purchases

  • Financing, which covers loans payments and proceeds, and owner investments and withdrawals

Cash Balance

The cash flow statement begins with the company’s total cash balance at the start of the designated period, which can also be found at the end of the previous cash flow statement or on the balance sheet. Cash flows are then determined by looking at the flow of cash within operations, investing and finance. Inflows are recorded as a positive number, and outflows as a negative.

Operations

Operating activities is where you do business. These are the direct and indirect costs that come from selling a product or service. This number includes the company’s income from sales, which is calculated in the income statement, as well as any cash flows that are not integrated into the income statement. Operational activities may include: cash from continuing operations; a rise or fall in accounts receivable; depreciation and amortization of the value of the business’ assets; and income taxes paid.

Investing

Investing activities are the buying and selling assets or securities that are not related to your inventory or operations. This can include long-term assets such as property, equipment, investments, stocks and loan payments that have been given or received by your small business. This section will often be in the negative, because it involves the disbursement of cash into various equipment, property, securities or investments.

Finance

Finance activities include issuing or purchasing stock or equity, borrowing money, repaying debt and distributing dividend payments.

New Cash Balance

Now just add up the positive numbers (inflows) and negative numbers (outflows) of cash under operating, investing and finance activities, then add those three values. Subtract the previous statement’s cash balance from the current period to determine the net increase in cash and cash equivalents.

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