Understanding the Ins and Outs of a Cash Flow Statement

In any type of business, the three most important financial statements are the profit and loss statement, the balance sheet, and the cash flow statement. Of these three, the cash flow sheet is probably the least understood because it doesn’t show exactly how much income the company has earned or how much it’s worth at a particular moment in time. However, the cash flow statement is invaluable in showing exactly what it says: how cash flows in and out of the company.

cash-flow

The basic way to begin a cash flow sheet is to start with the net profit amount in the income sheet and then work your way towards the current cash amount in the corresponding balance sheet. You can also work backwards by starting with the cash amount and working towards the net profit amount.

Along the way, certain additions and deductions will be made based on the company’s expenditures for that period. There will be the usual production expenditures such as raw materials, labor expense and overhead costs. Administrative and marketing expenses will also be taken into account. Asset expenditures are a bit trickier as the total value of the asset such as vehicle or building will show up on the balance sheet, but payments are made in an installment basis.

Over time, you will see a pattern of where most of your company’s money goes, and how much you end up with on a regular basis. It’s not imperative that you learn how to do a cash flow statement by yourself, but learning where everything goes will be of great benefit to keeping your company afloat.