What is cash flow statement?

A cash flow statement is a financial statement that indicates cash inflows and cash outflows. It outlines clearly your cash sources and cash uses, which is important for any business, but especially important if you are applying for financing or planning to grow your business.

The statement is divided into 3 sections. The first section covers operating activities. Operating activities are what cash you generate from providing a product or service and, ultimately, what cash you expend transferring ownership of goods or services to customers and also to pay suppliers, salaries, and operating expenses (rent and taxes). If your inflows are greater than your outflows of cash generated from operating activities, this is a very good indication that you are managing your business well.

The second part is about investment activities. Here we are tracking cash that was used in buying or selling long-term assets such as machinery, properties or investments. If you are investing excessively, it could indicate that your company is expanding. This is a positive outcome; however, you would also want to ensure that you are not over-leveraging you resources.

The third part is financing activities. This shows money that is coming into the business (such as loans, investments or selling shares), and money going out of the business (such as loan repayments or paying dividends). If you're raising a lot of cash from loans, this could mean that you're expanding; however, you want to make sure you are maintaining healthy levels of debt.

Lenders and creditors pay very careful attention to your cash flow statement to understand if your business can handle timing of bills, and the ability to pay back loans from your cash reserves.