THE CASHFLOW STATEMENT: WHAT IS IT? - easyaccountingwithdelight.com

The cashflow statement is one of the most integral statements in accounting and finance. It follows all the cash activities and must match with the cash amount on the balance sheet

Flat lay of US dollar bills with calculator and notebook for budgeting.

What is a Cashflow Statement?

A cash flow statement of a business is simply a financial statement that shows how much cash is coming in and going out of a business during a specific period.

Why is it important?

Why is the cash flow statement such a big deal? Why do accountants, investors, and enterprenuers care about it?
Here’s why:
Profit doesn’t always mean cash. A business might show a big profit on paper, but still be struggling to pay rent, salaries, and bills. That’s because profit includes things like credit sales — money you haven’t received yet.
Many businesses fail because of poor cash flow, not because they’re unprofitable. Therefore, the cash flow statement shows the real movement of money.

The Three Sections of a Cash Flow Statement

The cash flow statement is split into three main sections:

Operating Activities

Investing Activities

Financing Activities

1. Operating Activities

This is the money a business makes and spends doing its everyday work such as selling products and paying bills.
Examples include:
– Receipts from customers: cash received from selling goods or services.
– Payments to suppliers and employees: money spent to run operations such as rent, electricity, and water bills.
– Interest and income tax paid: payments to banks or the government.

2. Investing Activities

Investing activities show the cash a business spends or receives when it buys or sells items that will be used by the business in the long term.
Examples include:
– Purchase of machinery or buildings
– Sale of property, equipment, or investments

3. Financing Activities

Financing activities are all about how a business gets money from outside sources and how it pays them back.
Examples include:
– Borrowing loans from banks
– Issuing shares to investors
– Repayment of loans or dividends paid to shareholders