What is a cash flow statement?

Sven von Sperl
August 26, 2021

One of the more important terms to understand when you’ve just started running your business, especially if you want to know what’s going on with your finances is the cash flow statement.

Your cash flow statement is an at-a-glance view of how cash is moving in and out of your business. It means you can quickly understand how effective your business is at using money and make business decisions accordingly.

This statement allows you to easily identify how liquid your business is and what areas are costing your business the most money. It’s also a good document to have on hand to share with investors so they can understand how you’re projecting company growth and gain insight into your business strategy.

You also have a legal responsibility to prepare a cash flow statement as part of your due diligence as a business owner. The statement must be created in accordance with Australian Accounting Standards Board (AASB) requirements listed in Standard 107.

“An entity shall prepare a statement of cash flows in accordance with the requirements of this Standard and shall present it as an integral part of its financial statements for each period for which financial statements are presented.” — Statement of Cash Flows, Compiled AASB Standard 107, p. 5.

What makes a cash flow statement?

Your cash flow statement comprises three key statistics about the movement of money within your business.
• Cash from operation activities
• Cash from investment activities
• Cash from financing activities

In other nations, this statement could arguably include noncash transactions for ease of understanding but the Australian Accounting Standards Board (AASB) specifies that information is on a separate document.

“Investing and financing transactions that do not require the use of cash or cash equivalents shall be excluded from a statement of cash flows. Such transactions shall be disclosed elsewhere in the financial statements in a way that provides all the relevant information about these investing and financing activities.” — Statement of Cash Flows, Compiled AASB Standard 107, p. 11.

These three statistics are the basis of your cash flow statement. So let’s take a closer look at what each of them means.

Cash from operation activities

Operating activities are the main revenue-producing activities of a business and other activities that are not investing or financing activities. This is the day-to-day operation of your business and the cash gained from selling the goods and services that your business provides.

Having this information on your cash flow statement is vital. It provides you with a key indicator of the extent to which your business activities have raised enough cash, and more importantly enough cash flows, to repay any borrowed money and continue operating your business.

Operating your business isn’t just about operation capability, there are also considerations of paying dividends to shareholders and making new investments to encourage business growth. A healthy amount of cash from operating activities means that growth can be stimulated without needing to look at outside financing options. If this is the case then the business will be far more appealing to lenders and investors if your business chooses to engage them.

Cash from investment activities

Investing activities are the purchase and sale of long-term assets and other investments not included in cash equivalents. This can be assets such as land, debt instruments of other businesses, equity in other businesses, cash advances or loans to other parties such as vendors.

This part of the cash flow statement is important because it highlights the extent to which money has been used to create future income for the business. Investment activities allow for greater forecasting of future cash flow and shows that the business has diversified potential income.

However, there are limitations on what can be classified as an investment activity. Only purchases that are listed as a recognised asset on the balance sheet (the statement of financial position) are considered legitimate.

This includes: cash used to buy property, equipments, intangibles, long-term assets, equity, debt instruments, cash advances, loans, futures contracts, forward contracts, option contracts, and swap contracts except for when they’re a part of dealing and trading in which case they’re financing activities. It’s a long and non-exhaustive list but covers most of what you’ll encounter as an investment activity.

Cash from financing activities

Financing activities are activities that result in changes in the size and composition of the contributed equity and borrowings of the entity.

It’s important to distinguish what makes up the cash flow from financing activities as it’s useful in evaluating the forecast on future cash flows. It’s information that anyone or any business will be interested in knowing before issuing capital to your company.

Financing activities include: cash from issuing shares and equity, cash payments to acquire or redeem shares in the entity, cash from loans, notes, bonds, mortgages, and other borrowing. It also includes cash repayments on borrowed money and cash payments for the outstanding liability relating to a finance lease.

Again this is not an exhaustive list, but it illustrates the type of cash movement that matters as a financing activity. Your cash flow statement is a major part of understanding how your business is doing and its overall performance and financial health. It’s not something you can afford to not do properly and it’s why having a true understanding of all expenditure is so important.

Sven von Sperl
August 26, 2021