Reading A Cash Flow Statement

          Ah, the Statement of Cash Flows.  Most out-of-the-box accounting software has one available in the report section.  You may also receive one from your bookkeeper, or your accountant.  It can seem a little cryptic (and maybe even pointless).  In fact, the Statement of Cash Flows is one of the most useful reports a small business owner can have.  While the actual statement may not have answers, it can be used to ask some telling questions.
          There are three sections of the Cash Flows:  operations, investing, and financing.  As the names suggest, each one relates to the business activities.  The SEC has a great document outlining the accounting behind all three of these, so I am not going to go into that.  The general rule is positive numbers mean cash increased in that account, and negative numbers indicate cash decreased (or was used).
          In the Operating section of the cash flows, the main points are:  operating income, or your profitability for the period; changes in receivables; changes in inventory; and changes in payables.  An increase in receivables and inventory will be a use of cash (negative number).  An increase in payables will be a source of cash (effectively, you are borrowing from your suppliers).  While reviewing the accounts, ask yourself the following questions:  

• If the operating income is a negative number, is it attributable to an event, or a trend?
• Are receivables increasing  or decreasing as a result of sales activity, or collection activity?
• Are payables increasing as a result of more purchases, increased costs, or slower payment?
• How does the activity in payables relate to receivables?  Here, you may see an increase in receivables and an increase in payables.  Effectively, your customers are borrowing from you, and you are borrowing from your vendors.
• Is the change in inventory due to quantity or price changes?  Is the change related to the change in sales?  Is the change reflected in the change in payables?

The Investing section of the cash flows primarily relates to assets you've purchased.  The main question to ask here is:  

• Are the asset purchases contributing to profitability (operating income)?

The Financing section of the cash flows relates to money borrowed to run the business.  This money can be in the form of loans, credit cards, or even your own cash (equity).  

• Are the funds used for operations or for investing?  

If the funds are being used for operations, you may want to look further into the company's profitability.  The use of cash in this section (a negative number) should be intentional, such as a loan to purchase machinery.  Unintentional financing, such as a creeping credit card balance, are signs of larger issues.

          Reviewing your Statement of Cash Flows and asking the above questions will help you get a handle on trends in your business, and how your cash is working (or not) for you.  After a few times, you will find that this report is just a meaningful as your income statement.