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The statement of cash flows is one of the main financial statements. (The other financial statements are the balance sheet, income statement, and statement of stockholders’ equity.)
The cash flow statement reports the cash generated and used during the time interval specified in its heading. The period of time that the statement covers is chosen by the company. For example, the heading may state “For the Three Months Ended December 31, 2011″ or “The Fiscal Year Ended September 30, 2011″.
Cash is what keeps your business functioning. It’s important to know the financial health of your business, which is why you need to understand the purposes of your different financial statements. Your traditional financial statements include a balance sheet, profit and loss statement, and cash flow statement. What does the cash flow statement tell you that the others don’t?
The cash flow statement organizes and reports the cash generated and used in the following categories:
Operating activities include your day-to-day operations. Increases and decreases in receivables and payables are accounted for on your cash flow statement, as are other activities from operating your business and selling your products and services. The operating section is where your main cash flow should be generated. Long-term business health comes from having a good net profit and positive cash flow from your operating activities.
Investing activities include the purchase and sale of your long-term fixed assets, such as property, plant and equipment.
Financing activities include the borrowing and repayment of long-term liabilities.
Understanding what your cash flow statement is telling you about your business is critical. All three of your main financial statements–balance sheet, profit and loss statement, and cash flow statement–relay a different view of your business, and each is critical to the overall health of your business.
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