The cash flow statement enables you to track cash as it flows in
and out of your business and reveals to you the causes of cash flow
shortfalls and surpluses. The operating activities are the daily
occurrences that are essential to any business operation. If these
are positive, then it indicates to the owner that the business is
self-sufficient in funding its daily operational cash flows
internally. If the number is negative, then it indicates that
outside funds were needed to sustain the operation of the
business.
Investing activities generally use cash because most businesses
are more likely to acquire new equipment and machinery than to sell
old fixed assets. When a company does need cash to fund investing
activities in a given year, it must come either from an internal
operating cash flow surplus or from financing activity increases or
from cash reserves built up in prior years.
Financing activities represent the external sources of funds
available to the business. Financing activities typically will be a
provider of funds when a company has shortfalls in operating or
investing activities. The reverse is often true when operating
activities are a source of excess cash flow, as the overflow often
is used to reduce debt.
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The increase/decrease in cash figure at the bottom of the cash
flow statement represents the net result of operating, investing
and financing activities. If a business ever runs out of cash, it
can't survive, so this is a key number.
You will be able to use the cash flow statement not only to
analyze your sources and uses of cash from year to year but also
from month to month if you set up your accounting system to produce
monthly statements. You will find the cash flow statement to be an
invaluable tool in understanding the hows and whys of cash flowing
into and out of your business.
You will need accurate and timely financial information to help
you manage your business effectively. Your financial statements
will also be critical budgeting tools as you seek to achieve
financial milestones in your business.
Excerpted from Start Your Own Business: The Only Start-Up
Book You'll Ever Need, by Rieva Lesonsky and the Staff of
Entrepreneur Magazine, © 1998 Entrepreneur Press