• Jamie Reynolds

Riding the Cash Flow

The last two blogs we've discussed two of the three most important small business financial documents: the Profit and Loss Statement (P&L), and the Balance Sheet. Now it's time to break down arguably the most important of them all, the Cash Flow Statement.

Everyone knows that cash is king in a small business. Without it, there is simply no way to keep your business afloat. But, one of the most common conundrums for small businesses is that you can be making money and growing, and yet still have trouble paying the light bill each month. How can that be?

When a profitable business is having trouble making payments, that can often indicate an issue with the timing of cash coming in and out of the business, otherwise known as cash flow. While the P&L is great at showing where your money is being spent and whether your business is profitable, and the Balance Sheet is great for showing how much value you're bringing to shareholders, neither of them tell you whether you'll make payroll this month.

That's where the Cash Flow Statement comes in.

This is a great example of simplified Cash Flow Statement

So, let's take a look at what makes a Cash Flow Statement tick:

You start by picking the period of time you'd like to analyze. In the example above, it's for the entire year ending December 31, 2016. At the very top (not shown here) you would put your starting cash position (how much you had in the bank at the start of the period). Then you figure out how much you made from operations by doing this:

Cash from selling your stuff

- Cash paid for inventory

- Cash paid for labor and other operating expenses


Total Cash from Operations

This is essentially your net profit from your Profit and Loss.

Next, you figure out how much cash you took in (or sent out) for investing. In this example, the only investment activity was selling and purchasing equipment.

Last, you figure out the cash flow from financing activities. In this example they subtracted the amount paid for a loan.

Then, you total it all up:

Starting Cash Position

+Cash From Operations

+ Cash from Investing

+ Cash from Financing


Ending Cash Position

With the information from your Profit and Loss, Balance Sheet, and Cash Flow Statement, a small business owner has all of the key financial data they need to make solid financial decisions.

If you'd like to learn more about how to read financial statements and gain key insights from them, reach out to us for a free business evaluation.


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