Why is it important to review your cash flow report?

As a small business owner, it’s extremely important that you keep track and review your financial statements, such as your cash flow report, on a regular basis. Your cash flow report can provide you with a lot of helpful information about the general health of your company and your overall financial state.

What is a Cash Flow?

Before going into what a cash flow report is and why it’s important to your business, you need to know what the cash flow of your business is. Understanding your cash flow isn’t that difficult. It’s the amount of cash flowing into your business compared to the amount flowing out. So basically, the profits of your business compared to the overhead costs, from the cost of the lease and the utility costs to the costs of your employees and your supplies.

Having a good cash flow enables your business to keep running. A good cash flow means that you have more money coming in then you have going out. A good cash flow will also make your business more attractive to lenders, creditors and potential buyers.

What is the Cash Flow Report?

The cash flow report is basically a consolidated indicator of your company’s cash inflow and outflow. You’ll find that the cash flow report is broken down into three sections – Operating Activities, Investing Activities and Financing Activities. The following is a brief breakdown of what all three of these sections contain:

  1. Operating Activities – The Operating Activities section includes items such as inventory, wages payable, income taxes payable, accounts payable and accounts receivable. Basically, all the items on your income statement. Keep in mind that these items are typically prepared using an accrual method of accounting. This is different than the cash flow statement, which uses the cash basis method. Certain non-cash transactions will need to be accounted for in the Operating Activities section by making a number of adjustments. A good business accountant will be able to help with this.
  2. Investing Activities – This section lists any purchases or sales of long-term investments. Long-term investments include items such as properties or equipment. Long-term assets that may be listed in this section can include land, company vehicles and furniture.
  3. Financing Activities – This section includes retained earnings, notes payable and payment of dividends. These items all have to do with transactions that occur in your long-term liability as well as your stockholders equity accounts.

The Importance of Reviewing Your Cash Flow Report

So why exactly is reviewing all of this information so important? Your cash flow report gives you a good idea of how financially stable your business is. One easy way to judge how your business is doing is by comparing the cash reported in the Operating Activities section to the net income that’s reported on your income statement. If the cash reported is higher, odds are your company is in good shape.

All of this information allows you to make informed decisions regarding your business, such as whether to apply for a loan or whether it’s a good time to sell or expand. Additionally, looking at your cash flow report allows you to figure out if you have enough cash flow for certain upcoming expenses, from your payroll to investments in new equipment or employees.

If you have additional questions regarding your cash flow report, be sure to contact us at Valezar & Associates today. Keeping track of and understanding your company’s finances can be challenging. We can help your small business with your accounting, bookkeeping, tax planning and more.