The Cash Flow Statement in a Nutshell

The third and final financial statement that you will receive from your bookkeeper or CPA is the statement of cash flows.  This statement will show how your practice spends its money and where that money is coming from.  Now why is this statement important?  This statement is probably the most transparent financial statement.  It’s not easy to tweak this statement to show that your practice is in any financial footing other then the one it actually is in. 

So when a practice owner wants to know if their practice is generating sufficient cash, as any healthy practice should, the statement of cash flows is the best statement to analyze.  It serves as a map that shows exactly where the cash is coming from and where it is going.  Since I’m a huge planner, the statement of cash flow is my personal favorite (yup, I have a favorite financial statement).  This statement is important when planning the long term success of your practice.

The cash flow statement shows cash flow from three different areas: operating activities, investing activities and financing activities. 

  • Operating activities: The cash flows from operating activities encompass the revenue-generating activities of a practice.  For example, cash received for product sales, payroll and supplier invoices.

  • Investing activities: The cash from these activities include all payments made to acquire any long-term asset, as well as cash received from the sale of any long-term asset.  For example, if you purchase the building your practice is in, that cash outflow would be categorized as an investing activity.

  • Financing activities:  These activities are those that will alter the equity or borrowings of a practice.  For example, dividend payments or the sale or repurchase of practice shares.

So now that we’ve broken down the different categories of the cash flow statement, I want to point out why it’s important to read this statement when making long-term plans for your practice.  If the cash from operating activities is GREATER than the net income, which means that the net income of the practice is considered to be “high quality”.  However, if the cash from operating activities is LESS than the net income, then the question arises as to why the income isn’t turning into cash.  This is a red flag for your practice and indicates that changes need to be made.  Here is where a good bookkeeper or CPA will come in handy for you and your practice.  Having a bookkeeper who can analyze your financial statements, specifically your cash flow statement, is crucial in understanding the health of your business and where you need to make critical changes to improve the financial health of your practice.

So that summarizes the Statement of Cash Flows.  If you haven't had a chance to read about the income statement or balance sheet read about them here.  See you then!