What is the Statement of Cash Flows? Any Other Important Financial Statements?

This is Part 7 in our “All About Bookkeeping” series.

If you missed our first six articles check them out here:

What Is Bookkeeping and Why Do I Need Bookkeeping For My Business?

What Are Bookkeeping Debits, Credits, and Chart of Accounts?

What Is Cash and Accrual Accounting?

What Is An Income Statement vs Balance Sheet?

How Do I Read An Income Statement and Why Is It Important?

How Do I Read A Balance Sheet and Why Is It Important?

We have covered a lot during the past few weeks in our All About Bookkeeping series. The past two weeks we have talked about the Income Statement and Balance Sheet. The final major financial statement that goes along with those two is the Statement of Cash Flows, which we will be discussing today.

1. What Is a Statement of Cash Flows?

Shows you how much cash is entering and leaving your business.

• Remember: When we were discussing Income Statements and Balance Sheets we said, “when you spend money it does not necessarily always go to your income statement and reduce profit.” As an example: if you take an owners draw, that is not an expense on the income statement, rather an entry to owners draw on your balance sheet.
• This can sometimes be confusing to business owners because an income statement does not necessarily give you a clear cash picture and neither does a balance sheet because when money leaves your account in could be on either or of those statements.
• In comes the Statement of Cash Flows or Cash Flow Statement – This gives you a report of all the money coming into and leaving your bank account, regardless of whether it hits the income statement OR balance sheet.

2. What Are the Different Parts of a Statement of Cash Flows?

Cash Flow from Operating Activities, Cash Flow from Investing Activities, and Cash Flow from Financing Activities

• Cash Flow from Operating Activities: This area represents the incoming and outgoing money related to your every day business operations.
  • For most of our clients this is where the majority of the activity presides. As an example, for an attorney this would be where items related to fees collected, advertising expense, client costs, rent, wages, etc. would be recorded.
• Cash Flow from Investing Activities: This area represents the incoming and outgoing money related to investments your business makes (think equipment, other companies, etc).
  • Think of this as a fitness studio, you go and spend $80k on workout equipment. This is where that would be recorded. Typically these are investments or asset purchases.
• Cash Flow from Financing Activities: This area represents the incoming and outgoing money related to financing your business (loans, owner’s contributions or draws, etc).
  • Any loan activity would be recorded is this section along with contributions that you make as the owner or draws that you take for personal use from the business.
• Why is the Statement of Cash Flows Important?
  • It provides you a clear cash picture. Often times we have clients come to us that say, there is no money in the bank, how can I be showing a profit of $80k. When we dig into that we can look at specific things like loan payments or owner draws that do not reduce profit but it is still cash out the door.  Example: Profit $80k but pay out $60k against a loan and take a $20k draw for personal items. You still have $80k in profit (since those items do not reduce profit) but no money left over. A statement of cash flows can make this clear for you.

3. What Financial Statements are Important to Small Businesses?

As we’ve discussed the 3 most important are: Income Statement (Profit and Loss), Balance Sheet, and Statement of Cash Flows – But, what else is out there?

• Countless Reporting Options: With most accounting software, there are endless options of reporting. Outside of the “big 3”, most other financial statements use will depend on the type of business you have and what data points you need to get out.
• Examples:
  • Aged Receivables or Payable
  • Income or Expense by Contact/Payee/Customer/Vender
  • Sales Tax Report
  • Bank Reconciliation Summary
  • General Ledger
  • Journal Report
  • Trial Balance
  • and so many more!

Alright, so we have covered a lot the past six weeks. This was the final major item to round out the financial statements and core of bookkeeping.

Next we will be discussing some common bookkeeping mistakes along with having a panel discussion with members of our bookkeeping team. If you have any questions, be sure to submit them to us!

If you don’t have an accounting or tax advisor (or you need assistance with anything discussed), click here to book your complimentary strategy session with JETRO.