Donna Reade

QuickBooks Online Advanced Certified ProAdvisor | Specializing in Business Advisory, Training, E-Commerce Solutions & Bookkeeping for QuickBooks Online

Demystifying Cash Flow Statements

54 - cash flowCash is the lifeblood of the business. Without it, you can’t pay bills, you can’t expand the business and you can’t pay employees. Most importantly as the business owner, you can’t even pay yourself!

Your business can show the most fantastic performance according to the income statement, with huge profits and yet have nothing left in the bank. In this situation your business would not survive. How could this occur? It could occur if you are not monitoring the cash flows of your business.

The Cash Flow Statement shows you what your business has been doing with its cash. Cash is king – in the business world and even in accounting.

Has you experience every day in your business cash flows in two directions – either coming in to your business or going out. On the Cash Flow Statement cash coming in to your business is shown as positive amounts, whereas cash going out from your business are shown as negative amounts (in parentheses).



The statement is divided into four parts:

  • Cash Flow From Operating Activities– the core activities of your business. This includes cash receipts (cash received) from your customers, cash paid to suppliers and employees, interest received or paid and tax paid. Dividends are cash payouts to people who have bought shares in your company. Dividends are similar to drawings in a small business where the owner is withdrawing some of the cash that he first put in the business.
  • Cash Flow From Investing Activities -Investing means the spending of cash on non-current assets. For example, you could be spending cash on computer equipment, on vehicles or even on a building. Thus investing activities mainly involves cash outflows for a business. Additionally included in this section are the cash inflows relating to the sale of a non-current asset that you have already invested in. Thus, the cash received this year from selling equipment that was originally bought (invested in) three years ago, would also be included in this section.

As investing activities mainly deal with cash outflows (buying non-current assets), the total of this section is usually a negative.

Purchases of assets are put under two different categories:

                                 Additions means purchases of additional assets in order to expand the business.

                                Replacements do not involve expansion but rather refer to an asset being purchased to replace an old or obsolete (no longer used) asset.

                                **Proceeds means cash received.

  • Cash Flow From Financing Activities Financingis the source of the cash that we will be using to invest in non-current assets. It is where we get cash from. Financing can come from the owner/owners equity or liabilities/loans. Additionally included are cash outflows in this section that relate to financing that we originally obtained. Thus the repayment of a loan (in part or in full) falls under financing activities (as a cash outflow), as the loan served as finance for the business originally.

Similarly, draws or dividends for a corporation are placed under this section.

Finally, as financing activities mainly deal with cash inflows (receiving cash from shareholders or lenders), the total of this section is usually a positive for cash flow.

  • Net Increase/Decrease In CASH for the period and the cash balance at the beginning and end of the period.

One last thing the Cash at the End of the Period must match to the Balance Sheet for the same period. See not so bad right. If you still need help understanding your Cash Flow Statement and how it relates to your business just reach out to me. I will be glad to talk to you and take the mystery out of your Cash Flow Statement.

3 Responses to Demystifying Cash Flow Statements

  1. Amit says:

    Thanks Donna. Helped me understand a few things.


  2. Joseph Ezenwa says:

    Great Article! Cash flow is key in any business.Without cashflow organization will crumble.

  3. Shelia Fluharty says:

    Hello There. I found your blog using msn. This is a very well written article.
    Thanks for the post. I will definitely