How cash flow statements can lead to business success

As a business owner, you probably think profits and revenue are the markers of your success. But monitoring cash flow — how much cash is coming into and going out of your business each month — may be just as important. And the best way to monitor it? Cash flow statements.

To see the power of cash flow statements in action, let’s imagine a fictional business owner learning the ins and outs of cash management for her busy make-believe bakery.

How cash flow can affect your business

Meet Maya, owner of the fictional French bakery Le Petit Velo.

Each morning, Maya arrives at the bakery before sunrise to prepare fresh baguettes and croissants for the morning rush. Things get busy quickly as customers start pouring in for coffee and breakfast pastries. In the flurry of serving patrons and restocking displays, Maya gets too busy to monitor the details of each transaction. 

At the end of each day, when she finally counts the register and takes inventory, the numbers tell her Le Petit Velo is profitable, but that’s about it. They don’t give her a complete picture of how much money is coming in and going out on a regular basis so that she can plan ahead. And Maya knows that even if the bakery is profitable on paper, not having enough cash on hand to buy flour or pay her employees could make it hard to keep operating.

Like so many other business owners before her, Maya has discovered that she needs to get a better handle on how cash moves into and out of the bakery over time.

What is a cash flow statement?

Monitoring incoming and outgoing cash each month shows you the real dollars flowing through your doors beyond just profits on paper.

That’s what a cash flow statement does: summarizes how much cash is entering and leaving your business over a given period by breaking down your cash transactions into three categories:

• Operating activities — Cash from operations covers day-to-day income and expenses like sales, payroll, rent and supplies. In Maya’s case, this means tracking product sales, ingredient costs, payroll and rent so she knows whether her core operations are generating enough cash day to day.

• Investing activities — Cash from investing tracks the money spent on investments in growth, like new equipment or a second location. At Le Petit Velo, this requires keeping tabs on investments in new ovens, mixers and display cases that can help boost growth and sales.

• Financing activities — Cash from financing includes business loans or other outside funding. Maya wants to keep a close eye on the balance of her business loans to manage how dependent her bakery is on those borrowed funds.

To get an idea of how it works, let’s imagine how Maya might put together her first cash flow statement.

Putting a cash flow statement together

Maya starts by pulling together information on the bakery’s operating, investing and financing activities over the past quarter.

Le Petit Velo Cash Flow Statement

Quarter Ended December 31

• Operating Activities
  • Cash from bread sales: $25,000 
  • Cash from cake sales: $15,000
  • Cash paid for ingredients: –$14,000
  • Cash paid for payroll: –$10,000
  • Cash paid for utilities: –$3,000
  • Cash paid for rent: –$5,000
  • Total Operating Cash: $8,000

• Investing Activities
  • Cash for new oven: –$10,000
  • Cash for mixer upgrade: –$3,000 
  • Total Investing Cash: –$13,000

• Financing Activities
  • Loan received: $15,000
  • Loan payment: –$5,000
  • Total Financing Cash: $10,000

• Net Cash Increase: $5,000

Reading the cash flow statement

With a baseline quarterly cash flow statement complete, Maya can now see clearly how much money is flowing into and out of Le Petit Velo’s operations and where it’s coming from.

In her most recent statement, Maya’s net cash increase was $5,000 for the quarter. But looking deeper, she sees places to improve:

• Her operating activities generated $8,000 in cash this quarter, which reflects cash flow from core bakery sales.

• In her investing activities, she spent $13,000, creating a $5,000 deficit between the cash she spent and the cash she took in through day-to-day operations.

• Her financing activities brought in $10,000 of cash from loans, which helped to fill the $5,000 cash deficit.

By the numbers, Maya spent $5,000 more than she earned. The good news is that because Maya won’t be making major equipment purchases every quarter, she’ll spend less and have an opportunity to turn her cash deficit around on her next cash flow statement.

How cash flow statements fit into your financial reporting

Along with the income statement and balance sheet, cash flow statements are part of a business’s core financial statements:

• Income statements show revenues earned and expenses incurred over a period of time to provide a picture of overall profitability but not cash balances.

• Balance sheets summarize assets, liabilities and equity at a single point in time, but they don’t track cash flows.

• Cash flow statements complement income statements and balance sheets by tracking cash coming in and going out to provide visibility into the cash on hand to meet business obligations.

For a small business owner like Maya, monitoring all three statements together can give her a better idea of the financial health of her business.

Why cash flow statements are useful

Getting into the habit of preparing cash flow statements is valuable for business owners because these documents provide insights and visibility that help inform better financial decisions. For example, business owners can use cash flow statements to:

• Check available cash to cover upcoming bills and expenses. In Maya’s case, she can check her bakery’s available cash to pay bills on time.

• Analyze data over time to identify low cash flow issues, like declining sales or high investments. Maya can use her statements to spot low cash flow areas, like falling cake sales.

• Assess whether net cash flow covers monthly debts and operating costs. Maya can ensure her net cash flow covers debts and costs each month.

• Use trends to budget and plan spending for future periods. For example, Maya could reduce new oven investments to free up cash for more marketing.

• Provide the statements to potential lenders to qualify for business loans. Maya can use her cash flow statements when she applies for financing to open a second bakery location.

Using cash flow statements to build your business

The point of Maya’s story is that preparing regular cash flow statements can give you a powerful tool for keeping your business financially healthy. Look at trends over time in each section. Where are cash surpluses or deficits arising? For example, you may experience shortfalls in cash during busy seasons when you overspend on inventory and supplies. You can plan ahead for that next year.

With a solid foundation of cash management in place, you can focus on doing what you love most while making better-informed business decisions behind the scenes.­ In Maya’s case, that’s serving delicious baked goods. In yours, it could be coaching clients or designing products.

The key takeaway? Understanding your cash flow helps take a lot of the financial guesswork out of running your business. And monitoring and managing cash flow well can mean the difference for your business between just getting by and actively thriving.

Looking to take your business finances to the next level? Reach out to a Chase business banker today. We’re always ready to help.