what goes on a cash flow statement

Bookkeeping 101: What Goes on a Cash Flow Statement?

4 min read • Nov 02, 2020 • Derek Miller

Bookkeeping is the process of recording and organizing each financial transaction within a company. Much like keeping score of a football game, your bookkeeping tracks money within various business accounts—giving you the “score” or financial standing of those accounts.

Companies can generate hundreds (and even thousands) of daily transactions, leaving many owners and investors overwhelmed when looking at the ledgers. Because of this, accountants have developed high-level statements that report on the operations of the company and allow managers to make decisions from these reports. The cash flow statement (CFS) is one of the most important. 

The CFS is often generated alongside the balance sheet and income statement. It has been a mandatory part of a company’s financial reports since 1987. This statement gives companies and investors an idea of whether or not a company has enough cash on hand to cover its expenses. Based on this document, businesses can change how they store their money for better operations. 

Keep reading to learn about the CFS and what you should include in it. 

What Is on a Cash Flow Statement?

To understand the CFS, it helps to break down the terminology within each statement. Cash refers to money in its liquid form. The cash account has money that is available immediately, unlike other asset accounts like accounts receivable, investments, prepaid expenses, and inventory.

For example, a business might be “asset rich but cash poor” if the owner has paid off the mortgage and owns a large fleet of new vehicles but only has $1,000 in spendable money on hand.  

These statements look at both the cash on hand and cash equivalents of a business. Cash equivalents refer to money in the bank, short-term investments, and other assets that can be converted into cash quickly.

With that in mind, cash flow statements report on the movement (flow) of cash and cash equivalents into and out of a business. 3 types of cash flow are reported on a CFS:

  • Operating Activities: These are the main revenue-generating activities for a business. They refer to income from the business’s sales, whether the company sells physical items or services (like consulting, massage, or dog grooming).   
  • Investing Activities: This refers to cash flow from long-term assets or investments. This includes items like equipment, vehicles, and real estate that provide long-term value to the business.  
  • Financing Activities: This cash flow includes sources from banks and investors, as well as dividends paid out to shareholders.

Cash flow statements refer to both incoming and outgoing sources of income. For example, when a business raises a new round of capital from investors, the CFS reports it as “cash in” because the company has more liquid funds. When these investors are paid back (with dividends), the statement reads “cash out” because the money leaves that account.  

How Do Investors and Lenders Use the CFS?

Business owners use the CFS to ensure their company is operating on good financial footing, but this document is also used by outside parties that have a stake in the company’s success. 

Investors often use the CFS to make sure the company is on track to turn a profit so they can start to recoup their funds. They want to see how much of their investment is going toward equipment and investing activities as opposed to daily operations. They also want to see how the company pays out dividends or pays back investors.  

Lenders look at the CFS when determining whether or not a business qualifies for a loan. A strong CFS can assure a lender that the company is making strategic spending decisions and taking steps to “cash out” financial investors, reducing the perceived risk of lending them cash. Loans approved by lenders can then be used to expand the business or cover necessary costs to make the business even more profitable in the future. 

What Does a Negative Statement Mean?

A cash flow statement is not a bank statement. If the numbers fall into the negatives, it doesn’t necessarily mean that the business is failing or in dire need of income. For example, a company might have a negative cash flow statement in the months before it opens. During this time, there are a lot of expenses without any real income coming in. 

Additionally, companies have negative cash flows when they expand. After a business secures “cash in” from investors one month, it might “cash out,” the funds in long-term investments like equipment or real estate the next. 

Investors and business owners often track cash flow over a set period or multiple periods to get a clear picture of where cash comes from and where it goes. One snapshot doesn’t paint a comprehensive picture of a business.  

A Healthy Business Needs Accurate Cash Reporting

Cash flow statements look different for every business and will change as your company matures. Good bookkeeping can help you track your company’s growth over time and its increased profitability. You can then use these statements to win over additional investors and lenders to continue your expansion. 

Good bookkeeping starts today. Consider using a service like Lendio’s software, which makes it easy to sort and report your financial ledgers. Learn more about us today.

Bookkeeping not your jam? Outsource it to the professionals. Lendio provides professional bookkeeping services to take one more thing off your plate.

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Derek Miller

Derek Miller is the CMO of Smack Apparel, the content guru at Great.com, the co-founder of Lofty Llama, and a marketing consultant for small businesses. He specializes in entrepreneurship, small business, and digital marketing, and his work has been featured in sites like Entrepreneur, GoDaddy, Score.org, and StartupCamp.