Cash Flow Statement
/kæʃ floʊ ˈsteɪtmənt/
A cash flow statement is a financial document that tracks all the money coming into and going out of your business over a specific period, showing exactly how your cash position has changed.
A cash flow statement is a financial document that tracks all the money coming into and going out of your business over a specific period, showing exactly how your cash position has changed.
A cash flow statement reveals the reality of your business's liquidity by categorising cash movements into three main activities: operating (day-to-day business), investing (buying or selling assets), and financing (loans, investments, and dividends).
Unlike profit, which can include unpaid invoices, this statement shows actual money you can access right now.
Your profit and loss statement might show healthy profits whilst your cash flow statement reveals you're running out of money - this happens because profit includes sales you haven't been paid for yet.
The cash flow statement only counts money when it physically enters or leaves your bank account, giving you a more accurate picture of your ability to pay bills.
A cash flow statement helps you spot potential cash shortages before they become critical, allowing you to arrange funding, chase late payments, or delay non-essential spending.
It's particularly valuable for understanding seasonal patterns in your business and planning when you'll need to access additional funding.
Most businesses prepare a cash flow statement monthly, though weekly reviews become essential during rapid growth or tight cash periods.
You'll definitely need one when seeking funding, completing annual accounts, or if you notice your bank balance doesn't match your reported profits.
Persistent negative operating cash flow suggests your core business isn't generating enough money to sustain itself, even if you're profitable on paper.
Similarly, if you're constantly relying on external financing activities to cover operating expenses, this typically indicates an unsustainable business model that needs addressing.
You can strengthen your cash flow statement by negotiating shorter payment terms with customers, extending payment periods with suppliers, and reducing inflated inventory levels.
However, remember that manipulating the timing of payments just before preparing the statement creates an unrealistic picture that experienced investors will spot immediately.
