Understanding your cash flow statement is critical to understanding the wellbeing of your business.  Cash is the lifeblood of any business and you need to know where it is going, what is consuming the cash and how it is being invested.  Your cash flow statement tells you these things.

Essentially the Statement of Cash Flows captures the numerical difference in the balance sheet accounts from one period to another based on a selected date range.  Since popular platforms like QuickBooks can be a little confusing, I’ll explain the basic structure of your cash flow statement:

• Net Income - The initial source or use for cash and clearly an operating activity.
• Operating Activity - This section identifies the difference in the balance sheet accounts from one period to another based on a selected date range based on the operating activity of the business.  For example, the difference is accounts receivable, accounts payable, or inventory. 
• Investing Activities - This section identifies the difference in the balance sheet accounts from one period to another based on a selected date range that relates to the capital expenditures or the fixed (or intangible) assets of the business.  For example, the difference in the vehicle account.
• Financing Activities - This section identifies the difference in the balance sheet accounts from one period to another based on a selected date range that relates to the bank and debt activity of the business.  For example, the difference in the line of credit or vehicle loan account. 

The logic in using differences in balance sheet accounts is that each has an impact on cash.  Think about this: If accounts receivable goes down $10,000 for a date range, that means you collected cash in that period.  Also, if it were to go up by $20,000 for a date range, that means you have cash tied up in accounts receivable. 

Overall, business owners who understand their cash flow statement have a better handle on their business because they know where their cash is going.