“Our Income Statement shows that we are profitable, but how come our company is definitely strapped for cash? ” This is a common question I get from managers and business owners alike. And I always inform them that the Cash Flow Statement is one place to look for answers. This financial declaration is one of the reports mostly overlooked specifically by small business owners. Most of the time, they are not also aware that this financial statement is among the basic reports they should be getting off their accountants.

The Cash Flow Statement shows the actual cash generated by the firm for a given period. It is mainly composed of three main categories:

Funds generated from or used in operations
Investments made by the company
Financing transactions
Cash Flow from Operations

This classification revolves around four activities:

Series from customers
Payments to providers
Other operating cash outflows such as sales & marketing and administrative costs and interest payments
Cash taxes payments
A positive net cash flow from operations means that the company’s core company operations is able to sustain itself — the collections from customers are enough to cover the day-to-day requirements of the business.

A negative net income from operations means that the cash inflows from the company’s operations are not sufficient to cover the daily costs plus expenses.
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This is quite expected regarding companies who have just recently started operations because efforts are still focused on product sales and marketing to build customer base. But management should always work to enhance the net cash flow from operations to make sure investors that management is effective in controlling the financials and operations of the business.

Cash Flow from Investing Activities

This section usually shows the quantity of cash spent by the company on capital expenditures, such as new manufacturer equipment or business expansions. This section also includes other monetary assets (such as money market funds) and acquisitions of other businesses.

There is a negative net cash flow from financing activities if the company place money into investments during the period. It is good to see a company re-invest some of its profits back into the company to cover depreciation of its fixed possessions and/or to finance business enlargement.

Conversely, the net cash flow from funding activities is positive if the firm liquidated or sold some or even all of its investments. This may occasionally be required to generate funds to augment the particular operational requirements of the business. Liquidating investments is better compared to borrowing funds from the bank or other creditors because the company will not have to pay passions.

Cash Flow from Financing Activities

It shows the outside financing activities carried out by the company. The cash inflows from financing activities pertain to extra capital from investors or through borrowings from the bank or various other creditors.

The cash outflows from funding activities, on the other hand, result from repayments associated with bank loans and other borrowings and/or money dividend payments given to investors.

Effective Cash Management

A big part of running a business is managing the funds. You need to make sure that your company’s cash inflows are timely and enough to hide your cash outflows. Your company will be attractive to potential investors when they see that your over-all operations produce adequate totally free cash flow (FCF). Free cash flow demonstrates your company has the ability to pay debts, pay dividends and facilitate the growth of the business.