They say “Cash is King” and they’re right. If you want to know what you are spending and where it is going, the cash flow statement is an accounting basic.
The cash flow statement is part of accounting 101 and it tracks how cash is moving in and out of the business. This is a key distinction from other financial statements, which report obligations and income that might not immediately affect the cash position (for instance, they might report a sale on credit where you haven’t actually been paid yet!).
The cash flow statement is broken into three main sections: operations, investing, and financing, each of which address different areas of the business and different types of activity.
- The “Operations” section of the cash flow statement summarizes the money received from customers less the cash spent to run the business. This essentially reports the cash left over after a business makes sales, pays employees, buys products, and other normal business expenses.
- “Investing” captures cash paid to buy non-current assets, or cash received from selling non-current assets; non-current assets can include things like stocks purchased in other businesses.
- “Financing” includes any cash gained by taking out a loan or receiving new investment, less any cash spent on dividends sent to shareholders.
The table below provides a basic example of a statement of cash flows and shows each of these key elements