We’re sticking with the summer reboot here on New Venture Mentor even though daylight saving just happened and we’re clearly well into fall. It was 72 degrees here in Chicago though, so I’m allowing the summer reboot to continue. Anywho, This week we’re doing a five-minute finance lesson on the basics you need to know about your statement of cash flows.
Since I work with first-time entrepreneurs who don’t typically have any background in business management, I spend a lot of time talking with my clients about financial statements and getting them up to speed on what’s what. Now, clearly, nobody is going to become an accountant overnight – nor should you try to – but every business owner should have enough knowledge to understand what an accountant is telling you about the financial state of your business and to be able to read basic financial statements yourself and get the pulse of your business’ health. So, as step one towards that goal I’m giving a series of 3 five-minute finance lessons to give you a brief overview of the three basic financial statements: the income statement, the statement of cash flows, and the balance sheet. This week, we’re covering the statement of cash flows, which is super quick, so this will be a short video.
The statement of cash flows is just as it sounds and shows the flow of cash into and out of your business. The statement of cash flows is incredibly important because one of the key issues faced by new businesses is cash flow. It is possible (and common) for a business to be profitable but to go out of business because poor cash flow doesn’t allow for the timely payment of bills.
The statement of cash flows is broken down into three sections: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. Operating activities are those directly related to the main operations of the business and you’ll be looking at accounts such as accounts receivable and accounts payable to help you with this section. Investing activities are those concerned with a company’s investments such as the purchase or sale of a property or the acquisition of another company. Financing activities are those related to financing the business such as issuance or acceptance of debt or dividend payments. Please take a look at the example cash flow statement to get a better understanding.