Most business owners know their profit and loss. Fewer have looked closely at the cash flow statement. Yet it answers the question owners in Hanover, Hingham, and Weymouth ask most: if we made a profit, where did the money go?
Here is what a cash flow statement is, how to read it, and what to do with it.
The one-sentence version
A cash flow statement shows how the cash in your bank changed over a period, and why.
The profit and loss tells you whether you earned more than you spent. The cash flow statement tells you whether you ended the month with more money or less, and where the difference came from. They are different questions, and the answers can be very different.
The three sections
1. Operating activities
This is the cash from running the business: collecting from customers, paying suppliers, paying rent and salaries. It starts with your net income and then adjusts for things that affect profit and cash differently, such as:
- Customers who have not paid yet. If receivables grew, you earned income you have not collected.
- Bills you have not paid yet. If payables grew, you have expenses that have not left the bank.
- Depreciation. It reduces profit, but no cash leaves the bank for it.
2. Investing activities
This is cash spent on, or received from, long-term assets: buying a vehicle, new equipment, or a building, or selling one.
3. Financing activities
This is cash from or to lenders and owners:
- Loan proceeds coming in.
- Loan principal going out. The interest is on your profit and loss; the principal is not.
- Owner draws and distributions.
- Money the owners put in.
Add the three sections together, and you get the net change in cash for the period.
Why a profitable business can run short on cash
As Liliane Larsen tells clients: “A business can be very profitable, but they have no cash.” The cash flow statement shows exactly why. Common reasons:
- Customers are paying slowly, so receivables are growing.
- The business bought equipment outright.
- Loan principal payments are large.
- The owners took distributions.
- Inventory or supplies were bought ahead.
- Tax payments came due.
None of these appear as expenses on the profit and loss, but every one of them takes cash out of the bank.
How to read yours in five minutes
- Look at the bottom line first. Did cash go up or down?
- Check operating cash. Is the core business generating cash? If net income is positive but operating cash is negative, look at receivables.
- Check investing. Were there big purchases this period?
- Check financing. How much went to loan principal and owner draws?
- Compare to last month and last year. Patterns matter more than any single month.
QuickBooks Online includes a statement of cash flows report you can run for any period.
From looking back to looking ahead
A cash flow statement explains the past. Many owners also want to know about the next few weeks: will there be enough to cover payroll, supplies, and the equipment purchase coming up? That is a cash forecast, and it is built on the same numbers. When it is part of the engagement, we build short-term forecasts for our clients.
What our clients receive
Monthly bookkeeping clients receive a profit and loss, a balance sheet, and, where agreed, a cash analysis that shows where the money went, on the same schedule every month. Then we walk through them together.
Frequently asked questions
No. A statement looks back at what happened. A forecast looks ahead at what is expected.
Any business that has ever wondered where the money went will find it useful. Lenders often ask for one as well.
Usually because the underlying books are not reconciled, or loans and equipment are recorded incorrectly. Clean books make the statement accurate.
Start with a conversation
If you are on the South Shore and your profit and your bank balance never seem to agree, request a free consultation. Prefer the phone? Call 781-924-1489.
This article is general education, not tax or financial advice.