Interpreting your Financial Statements – Statement of Cash Flows

Running a small business in Canada is no easy feat.  It requires dedication, strategic planning and a keen eye for financial management.  We’ve discussed the purpose and benefits of having and analyzing a Balance Sheet and Income Statement, but there is one statement that isn’t as common, but is just as important, the Cash Flow Statement, or the Statement of Cash Flow.  This financial statement is one of the most all encompassing statements that a business can use to assess where their company has been earning and spending their money. 

The Statement of Cash Flow is a financial report that provides a detailed breakdown of the cash inflows and outflows of your business during a specific period.  It is typically categorized into three main sections:

  1. Operating Activities:  This section focuses on the cash generated or used in day-to-day operations, such as sales, purchases and expenses.
  2. Investing Activities:  This is where you will see if you made purchases or sold equipment, property or other investments.
  3. Financing Activities:  This section deals with the cash flow from borrowing or repaying loans, issuing or buying back shares of your company or other financing-related activities.

The key benefits of maintaining and creating a cash flow statement for your business:

  1. The Statement can give you a really good summary of whether your business brought in more cash than it spent in during a fiscal period.
    • Is your cash balance higher or lower at the end of the fiscal period?
  2. It will also breakdown for you as to how your business is generating its cash.
    • Is it all from operations?  Or was it supported from that additional line of credit or loan that your business took out during the year?
    • Are your operations generating sufficient cash to satisfy its debt obligations?
    • Is there positive cash being generated from your operations?
      • If it’s negative,
        • Is it because you have not collected on all of your outstanding Accounts Receivable?
        • Or have you had to increase your marketing expenses?
  3. It can also be used as a planning tool for the upcoming budget for future years.
    • If you have minimal purchases of capital equipment this year, will you need to purchase additional/newer equipment in future years?
    • If your cash from operations is negative or minimal,
      • Do you need to increase your budget on advertising? 
      • Do you need to layoff staff?
      • Or do you need to concentrate on collecting on your outstanding receivables?
    • Do the terms of your financing change in the coming years?
      • Will you need to seek out additional funds for your business? 
        • If so, can your business support the additional cash repayment terms that would be required of the company?

Overall, the Statement of Cash Flow is a very valuable tool that can empower you to manage your finances more effectively, make informed decisions, secure financing and pave the way for sustainable growth.