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The Cash Flow Statement: Analyzing the Lifeline of a Small Business


Cash is the lifeline of a small business. Many companies build from the ground up, using personal cash investments in the hopes that an income stream will eventually take over. An unanticipated shortage of cash funding may cause production issues and work stoppages, especially when access to credit is difficult. To monitor the inflows and outflows of cash for a growing business, a cash flow statement should be prepared and reviewed on a regular basis.

What is a Cash Flow Statement?

A cash flow statement shows the change in the company's cash balance during a specific period of time. Not only will this statement show the change in the cash balance, but it will indicate how the company’s cash balance changed. It will signal if the business made or lost money from normal operations, if the company borrowed money, if it lent money, how much debt it paid back, and more.

It is important to note that the cash flow statement is not an income statement. Financial advisers often stress that income does not equal cash, especially for companies with a large percentage of credit-based sales. When examining cash flow, adjustments must be made to the income statement to remove non-cash items, such as depreciation expense. Principal payments on loans are counted as cash flow items, but not income statement expenses.

Beginning Balance and Cash Receipts

A cash flow statement begins with a company's beginning cash balance. This is a summation of bank balances plus any petty cash on hand. The next step is to analyze cash inflow over a certain period — typically a month, quarter, or year — by listing all cash receipts.

Sources of Cash

Sales are the greatest source of cash for most businesses. But as opposed to the accrual method of accounting, where sales revenues reported on the income statement have been earned, but not necessarily collected, only sales revenues where payment has actually been received are reported on the cash flow statement.

Interest earned from bank accounts and investments is also listed as a cash inflow. Financing arrangements, such as small business loans or a line of credit, are another common source of cash. When funds from investors are received to fuel business growth, these amounts are included in cash receipts.

Cash Payouts

Once total inflows of cash have been measured, the next step in a cash analysis involves determining how much the company spent to maintain or grow the business. Examples of cash payouts range from payments to suppliers or vendors, to business expenses like employee salaries. Cash investments in property and equipment are reported as they occur, although for income statement purposes these assets may be depreciated over their useful life.

Operating Cash Flow

Many companies choose to analyze cash related to operating activities separately from investment and financing activities. Operating cash flow represents how well the business is funded on a standalone basis. In other words, while outside investments, loans, and lines of credit are alternative funding sources, a company must strive to profit from operations or it may not be viable for the long term.

Cash Flow for Seasonal Businesses

A cash flow statement is an important management tool for seasonal businesses. If a company takes in most of its cash sales during a few months of the year, it may need to time cash payouts so as not to run out of liquid funds. For example, investments in the business may be delayed until after the height of peak season sales. Since employees are often paid year-round, budgeting is important to guarantee the company can meet payroll needs.

The cash flow statement is one of the most important financial reports for small companies, especially in early years when cash flows can be erratic. Online accounting systems help small businesses analyze cash flow by capturing all transactions involving payments and receipts.


This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.