Business – Knowing Your Cash Flow


by Michael Lodge

Financial health on your business is good to know.  Understanding your cash flow and where you stand financially is vital for you to know.  Looking at your income statement and seeing there is a profit does not mean you have cash.  There is a difference between profitability and your cash flow.  There are many items that hit your cash but does not hit your income statement, and that is very important to understand.

  • Payment on loan principal
  • Payment of credit card principal
  • Owner’s draws

These items take cash out of your business and show up on your cash statement.  When you borrow money from a lender or credit card vendor, you don’t count it as income.  The interest and finance charges that you built up or incur on borrowed money will be booked as an expense and use of cash.  And when you invest money in your business as an owners investment, it’s not counted as income.  So when you take money out as an owner’s draw, it doesn’t count as an expense. Owner’s transactions affect your equity, not your revenue or expense accounts.  I know it is confusing, but as an owner you have to know what is and isn’t hitting your income statement and what hits your cash flow.  Remember income on an income statement is not cash.  Look at the example of a cash flow statement below.

cash flow example

When you look at your cash flow statement, and please ask your accountant to always provide you with one, you have three main components that where cash is coming from and going.

  • Operations – this includes your day to day operations.  Increases and decreases in receivables and payable, as are other activities from operating your business and selling your products and services. The operating section is where your main cash flow should be generated. Long-term business health comes from having a good net profit and positive cash flow from your operating activities.
  • Investing – include the purchase and sale of your long-term fixed assets, such as property, plant and equipment.
  • Financing – include the borrowing and repayment of long-term liabilities.

I would suggest that you sit down with your accountant on a monthly basis and have him/her train you on understanding your cash flow, it is vital to know.  Just don’t always rely on what is in the bank, know how is going to blow in and out of your bank that affects your business.  You can do so much by understanding your business cash flow and make improvements to the business.

If you have any questions regarding financial statements, cash-flows and tax issues you can call our office at:  877.778.1770.

Thank you to Pam Newman at Entreprenuer that put together a cash flow article and chart on cash flow