How Your Statement of Cash Flows Informs Business Decisions

Accurate, timely data from your financial statements provides the solid basis business owners need to make critical business decisions that can have far-reaching effects on their company and its future. Yet business owners I work with often share that their abilities to fully understand how to read, interpret, and apply the information from their financials to decision-making could use a confidence boost.

Three financials are foundational to effective decision-making: the income statement, balance sheet, and the third, the Statement of Cash Flows, which we’ll explore here.

Often considered the most essential financial document, and one that many companies don’t produce, is the Statement of Cash Flows. It illustrates how cash moves through your business from operations to investing and financing. Here are three ways it can contribute to making informed decisions.

1. Cash Flow from Operations

The first section of the Statement of Cash Flows provides a reconciliation of Net Income to cash flow provided from operations by analyzing the differences in Current Assets and Current Liabilities for the time period covered by the statement. If this number is negative for several periods, it’s an indication that you will need to seek financing or an injection of cash to have sufficient working capital to run your business

2. Planning for Growth

The second section of the Statement of Cash Flows identifies how much you are investing in fixed or other long-term assets to grow your business. This is typically a negative number since your cash is being invested in your business. Financing related to purchasing these assets is reflected in the last section of the Statement of Cash Flows. Understanding the impact of spending cash to grow your business by acquiring additional, long-term assets in concert with the cash flow from operations is critical. Negative cash flow from operations plus negative cash flow from investing could be a recipe for disaster and an indication that you need to make some changes.

3. Obtaining Credit and Funding Debt

The last section of the Statement of Cash Flows identifies your financing activities – both borrowing and paying long-term liabilities. Often a business owner does not know how much cash is needed to service the company’s long-term debt – information that the cash flow statement provides. In addition, amounts distributed or contributed to Equity will be included in this section. Understanding how your financing activities are impacting cash will provide insight into whether you can take on additional debt to fund your investing activities.

Cash Flow Forecasting

Take another step to prevent being blindsided by unexpected swings in cash flow. Learn to forecast cash flow and do it regularly. It will be invaluable, not only in guiding you to success, but in measuring your progress.

The Statement of Cash Flows is a measure of how much cash you are generating from operations to invest in your business and service your long-term debt. It is a critical tool for managing finances and making informed business decisions. Understanding how to track, assess, and apply the data it provides will enable you to better manage your finances and make informed business decisions.

My new Financial Fundamentals for Business Owners (FFBO) program provides the tools that empower owners to confidently assess essential financials, interpret the data provided, and apply it to your decision-making process. It’s like having a fractional CFO for a fraction of the cost! Contact me to learn more about how this program can benefit your financial intelligence and your business.

Written by

Rick Arthur is a CFO whose expertise is built on Financial Intelligence and 35 years in senior financial roles. Coupled with a CEO’s perspective and the experience of building his own $20 million company, he brings a unique depth of insight into business from the top down. Wired to get to know people, Rick works hand-in-hand with business owners of intentional, growth-oriented companies, solidifying relationships as a trusted advisor and confidant to his clients. He leverages his experience to help business owners gain traction and stay laser-focused on the company’s vision, cash flow, and profitability – all while creating big picture solutions for strategic planning, growth and sustainable success.