The cash flow statement shows all cash going in and out of a company over a specific time period or reporting period. Cash is King, it is pretty black and white - what you you see is what you have. The cash flow statement consists of three different parts, cash from:
👷♂️ Operating activities
🏭 Investing activities
💸 Financing activities
Separating the cash flows into these three categories gives more insight on where money is going in and out of the company and the money available for such activities.
Operational cash flow shows the cash inflows and outflows from the principal revenue generating activities. A company that is not making money from operations means that they need to deplete cash reserves or borrow. In this case, there will be a number of key decisions to be made. There can be good reasons for this such as scaling up a business and building a market position but in steady state, you would hope to be making positive operating cash flows.
With Numberslides, we use the indirect method to build the cash statement and it looks like this:
Investment cash flow shows changes in investments in assets and equipment so what is know as the acquisition (buying) and disposal (selling) of assets. It also includes returns from investments. Currently, in Numberslides, we focus on the buying of assets. In most start ups, we would expect this would be cash outflows as Assets are purchased to support the growth. For our forecasts, it looks like this:
Financing cash flow relates to cash changes arising from financing activities, in our forecasts this is either through equity finance or through a debt facility. This cashflows section also can include the dividend income paid to shareholders. Cash inflow occurs in case of raising capital (such as loans or equity) and cash outflow occurs in case dividends are paid or when interests on cash financing are paid. The financing cash flow shows how the company is managing it investment into the company and the balance between the level of debt versus equity (you may hear this referred to as "Gearing"). In the Numberslides forecasts, it looks like this:
We then add all these cash flows up to give us a "change in cash" for the reporting period i.e. did the overall cash flow go up or down in the month, quarter or year. This is then added to the previous time period to give us the current level of cash in the bank, this is shown below:
The cash flow statement allows management to make informed decisions on business operations and to monitor potential cash shortfalls which defines the timing and size of the investment requirement.
Now a small not on why cash and profit are NOT the same thing, which is a misconception that we have seen a lot. If you compare the Net Profit in your forecast to your closing cash position you will see that they are not same and moreover, that can be pretty different.
Cash flow is the actual money that flows in and out of your business throughout a given time period, while profit is whatever remains from your revenue after you subtract expenses. While profit will show you the short term success of your business, it does not take into account when money is actually paid and received.
If you give a major customer 60 days credit on an invoice, this revenue will be recognised in the Income Statement but will not appear on the Cash flows until it is in the bank account. So cash flow gives you the real and accurate picture. A likewise, a company can be making a Net Loss but still be cashflow positive.
Cash is critical and should be the number #1 focus for start ups while profit is a useful indicator of financial health.