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Cash Flow Statement: What It Is and How to Read It

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One of the most crucial things you need to understand as a business owner is your cash flow statement. It tells you where your cash is coming from and where it is going. This allows you to manage and control your finances, ensuring you always have enough to handle different scenarios.

If you do not know how to properly read a cash flow statement, it is time you learn how. This article will tell you exactly how to read and understand a cash flow statement properly. But before we get into that, we will first tell you what cash flow is and why it is crucial.

The purpose of the cash flow statement

As we mentioned earlier, a cash flow statement tells you where your money is coming from and where it is going, but it can do more than that. It can give you a detailed overview of what happens to your money over a specific period, known as the accounting period. It also shows your business’s short- and long-term performance, allowing you to make better decisions regarding its continued operations.

The importance of a cash flow statement

Together with other financial statements, a cash flow statement is an important tool that tells you how financially healthy your business is. This allows you to make smarter business choices that will enable your company to grow and maximize each dollar.

Cashflow Video Guide

Learn the simple steps to prepare cash flow projections to improve your business cash flows.

How to read a cash flow statement

The following is a rundown of how you can read a cash flow statement.

First, look at the statement from the business’s perspective. Identify just how healthy your business is based on how money is moving in your company. For instance, if you see that your cash reserves are dwindling, it may be a sign that your business is spending too much.

On the other hand, if you see a massive surplus in cash, it may be a sign that you are a profitable company. Regardless, these signs will tell you whether there is a positive or negative cash flow.  

In most cases, you want to ensure that your business has a positive cash flow, meaning more money is coming in than going out. Of course, there are some cases where that may not be possible, such as when your company is going through a massive transition and investing in new assets. Despite that, you must look for signs that tell you all about your company’s health and status. That way, you can make the right financial decisions to keep your company on the right path.

Conclusion

It is not easy to read a cash flow statement, so do not be surprised if you find yourself struggling when reading one. For that reason, we highly recommend working with a professional accountant to do the job for you. Not only will they make the statement, but they will also help explain precisely what it means. That way, you learn how to read a cash flow statement and, at the same time, get the information you need to make well-informed decisions to steer your business to success!

FiBrick is an accounting firm in the US focused on helping startups and scale-ups take control of their finances and achieve success. If you want to maximize your business cash flow, schedule a consultation with us today!

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