A Cash Flow statement shows the movement of money through a business. It’s a cornerstone financial report, and shows you the sources and uses of a business’ cash.
The cash flow statement tracks money into and out of a business, and calculates the increase or decrease in cash held by that business from the beginning to the end of a period of time.
All cash (including physical cash, bank accounts, and unreconciled bank items like outstanding checks and deposits) moving through a business is categorized into one of three sections: Operating, Investing, or Financing. The total of those three sections - whether positive or negative - is combined with the beginning cash balance to calculate the ending cash balance in the company.
The operating section, as the name suggests, displays all of the cash activity related to the regular operations of the business. Sales receipts, whether cash sales or payments received for accounts receivable invoices, are all shown here. Below that are the cash payments for expenses, including cash purchases and payments on accounts payable bills.
The investing section shows cash spent and received on fixed assets (also called property, plant, & equipment) and long-term receivables (like loans to the business owner). One item that doesn’t appear here is depreciation, because although it is an expense related to fixed assets, it is a non-cash or “book” expense, that is, no cash changes hands.
The financing section shows cash received from owner investments and loan proceeds, as well as cash paid to owners (including dividends and draws) and cash paid to the principal balance of loans. These payments of principal aren’t reflected on the income statement, so this is the only clear presentation of how much money is being used to pay down loan balances. This is also the only report where you can see how much money the owner is putting in and taking out of the business.
The cash flow statement is an important tool to make sense of a company’s performance. Many businesses start with negative cash flow for the first year or two of their existence, but for long-term viability, positive cash flow is critical. It’s also possible to have positive net income, yet have negative cash flow, so it’s important to look at both for a complete picture.