How do you determine if you’re running a successful business?
- Do you look at sales revenue?
- Is it what you see when you check your bank account balance?
- Do you look at your profit on your P&L statement?
- Is it based on your business’s increase in customers or clients?
- Perhaps success is receiving all 5-star Google reviews!
All of these methods can help you track your business’s performance, but they’re only as good as the hard data that comes from supporting documents like a cash flow statement.
The statement of cash flows or cash flow statement is my absolute favorite statement, and let me tell you why it’s so important for businesses!
Understanding a cash flow statement
A cash flow statement is an accounting document that explains where the money in your business came from and where it went.
- Every time you pay a bill, receive an invoice, or pay your employees, you’re moving cash around.
- Every time you send an invoice and await payment or receive a bill that allows you 30 days to pay and you wait until day 29, that also affects your available cash.
This statement summarizes every action taken with your cash as well as every action that will need to be taken with your cash. It’s the proverbial proof in the pudding.
If you have investors, they’ll likely want a cash flow statement to see how well your business manages its debt and funds its expenses. If you are applying for a loan, the bank will want to see a cash flow statement to assess whether you are able to pay them back. If you bootstrap or work for yourself and have a cash flow statement, it can help you assess your strengths and weaknesses in managing expenses and debt.
Is a cash flow statement required?
If you own or operate a business of any sort, a cash flow statement is highly recommended. Even if you are a one man or one woman operation, it can be extremely helpful.
There’s no minimum revenue level needed for a cash flow statement. In most cases, if you have expenses, debt of any sort (a business credit card counts), or invoice clients or customers, it’s advantageous to make use of a cash flow statement.
Why is a cash flow statement important?
It enables businesses to better manage their cash flow. But, if you take nothing more from this article, take this— It explains exactly why your business has the amount of cash it has in the bank on any given day.
Cash is queen (or king to some).
Without enough cash in your business, regardless of your revenues, your incoming orders, number of clients,or likes on Instagram, YOU – GO – OUT – OF – BUSINESS. Managing cash is one of growing businesses’ main challenges.
The cash flow statement provides information that the other financial statements do not. Often business owners lean on their P&L or profit and loss statement, which shows profit. Profit is great. Revenue and profit are absolutely important to the health and success of a business.
However, the P&L statement does not capture debt payments (credit card and loans), owners’ distributions, money owed to the business (receivables), or money the business owes (payables). All these things affect available cash. Failing to keep an eye on available cash can often lead to a business running out of cash.
Without a cash flow statement to help you make sense of it all, it will be next to impossible for you to manage your cash well.
How to get started with a cash flow statement
Getting started with a cash flow statement doesn’t have to be difficult. Whether you have been in business for some time, or are just starting out and want to make sure you have your business finances in order, we can help.
As business solutions experts, we have helped dozens of businesses untangle complex issues and clarify a path to greater profitability. Schedule a Discovery Session.