Ahh, the Statement of Cash Flows…also known as the ugly duckling of the bookkeeping world. But before you just go ahead and dismiss this report as too complex or in-depth, remember how the story of the ugly duckling ended! He turned into a beautiful swan, far more gorgeous than its duckling siblings! And that is what the Statement of Cash Flows is!
You are probably wondering what makes this report so special. Well, while the Profit & Loss tells you how much income you had and what your business expenses were for a period of time and the Balance Sheet tells you where more of the money went, to buying equipment, owner’s draw/distribution, etc., the SOCF tells you where all the money is going and to what purpose!
The best way to begin understanding the SOCF is to compare it to the Profit & Loss.. The income statement shows what the company earned in the past year while the SOCF tracks how much money was received and where it went. Income and cash are very different things.
The SOCF starts with showing how much cash the business had at the beginning of the year, then tracks how much cash flowed in and out of three main areas of the business. Then it adds it all up to show how much is left at the end of the year.
The three areas the SOCF shows are: Operating activities, Investing Activities, and Financing Activities. We will go into each of these in more detail as we work through this statement.
The SOCF can be looked at on a yearly, monthly, quarterly, or weekly basis. In this case, we will look at it on a yearly basis.
Starting cash: $50,000 (you can see this number is taken from the bottom of column “2012” because it is the cash remaining at the end of 2012, so it is the beginning cash of 2013. This number would also be on the Balance sheet for December 2012)
Net Income: $8,000 - in 2013 the company netted this much money (This number is found at the bottom of the income statement for 2013 and is the total of gross income - expenses to run the business.)
Adjustments to Net Income:
Inventory: Found on balance sheet, this company purchased $25,000 in inventory so on the balance sheet it is an asset but it is money that left the business.
Receivables: They are owed $10,000 by clients but this means they have not actually received this money yet. So while it would show up as income received on the Income statement, it is not a part of the cash we have in the bank yet.
Payables: Items this company has purchased but not paid for yet. This would be a liability on the balance sheet but for cash flow, it is a good thing because we still have this money in our accounts.
Taxes: This company has a tax bill but it hasn’t paid it yet. Again, this is money we still have.
After all these adjustments, we have a OPERATING cash flow of $30,000. The main reason for this is because they are waiting to pay bills. This looks good for now but once those bills are paid, their cash flow for Operating activities will decrease.
This shows what the company has done to invest in the future.
Capital Expenditures: This company spent some money this year buying a new office and improving it.
Investments: The company purchased some stocks and bonds
Business Aquisitions: If the business purchased another company, that investment would show up here.
The Total: -$160,000 - This company has spent a lot of money on investing activities, which may not have been a super smart decision, especially since they only generated $30,000 through Operating activities. Ideally, the investing activities should be driven more by the number from Operating activities because that is the money available to the company.
Since this company spent so much money in investing activities, it needs to make up the difference somehow. In this case, the company borrowed money.
Dividends: This company can’t really pay dividends right now because they are short on cash flow. If they has paid dividends, it would show up here.
Sale/Purchase of stock: It would be a good idea for this company to sell some stock to make up for lack of cash flow, but it would be hard to get an investor to purchase stock in this company after looking at the financials.
Borrowing: This company borrowed $85,000 this year, increasing its debt from last year considerably
Change in Cash & Cash Equivalents: Adding up all these lines shows that there was a negative cash flow for the company.
Result: The $50,000 this company had in its bank account at the beginning of the year is now down to $5,000. Things are not looking good for this company in the future!!
Download Thrive Bookkeeping's Cheat Sheet for the Statement of Cash Flows by clicking the Download button below!
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