A cash flow statement is an essential accounting document that’s used to measure a business’s incoming and outgoing cash. More specifically, it reveals changes in a business’s balance sheet that affect the business’s cash (and cash equivalents). While there are different ways to structure a cash flow statement, however, most consist of three primary sections. As a business owner, you should familiarize yourself with the various sections of a cash flow statement to take advantage of this accounting document.
#1) Investing Activities
The “investing activities” section of a cash flow statement represents the incoming and outgoing cash from investment-related tasks. This includes the purchase or sale of real property, loans given to customers or vendors, and payment associated with corporate acquisitions. Investing activities typically won’t affect your business’s cash flow as much as operating and financing activities, but they can still influence your business’s incoming and outgoing cash. Therefore, you should track them using the “investing activities” section of a cash flow statement.
#2) Operating Activities
The “operating activities” section of a cash flow statement is where you’ll record most of your business’s incoming and outgoing cash. Examples of operating activities to record in this section include payments to vendors, payments to employees, product or service sales and more.
#3) Financing Activities
Finally, the “financing activities” statement of a cash flow statement reflects incoming and outgoing cash associated with raising capital to run your business. Most businesses require at least some capital to get up and running. And even after a business is up and running, it may still need regular funding to sustain its operations. If your business borrows money or funds, you’ll need to record these transactions in the “financing activities” section of a cash flow statement.
Cash Flow vs Profits: What’s the Difference?
It’s important to note that cash flow isn’t the same as profits. While similar, each concept has a unique meaning. Profit, for example, is defined as the difference between a business’s revenue and its expenses over a specified period of time, whereas cash flow is the movement of all incoming and outgoing cash.
By keeping a cash flow statement, you’ll have a better understanding of your business’s financial efficiency. If your business isn’t efficient at spending money to make money, it will struggle to succeed. The first step to improving your business’s financial efficiency, however, is to create and use a cash flow statement.
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