The Statement Of Cash Flows is the least understood in my experience and not nearly enough people pay attention to I yet without it you do NOT have the complete financial picture for your company. You certainly cannot make informed decisions about the financial health and future of your company without a proper look and evaluation of what the statement of Cash Flows is telling us. This week we’ll look at how the statement of cash flows works. Then next week we will look at the 3 different sections of the statement of cash flows and what they tell us about the financial health of your company.

In terms of function the statement of cash flows is really a reconciliation of your accrual basis net income to your ending cash balance. It explains the difference between the two. That difference is essentially based on fluctuations in account balances on the balance sheet. I want to be really clear about this because this is where it can get really confusing. It doesn’t look at the BALANCE in the balance sheet accounts; it looks at the CHANGE IN BALANCE on each balance sheet accounts. The aggregate of all of the changes in all of the balance sheet accounts is exactly the difference between net income and ending cash balance. When you can really see this relationship you can begin to appreciate the beauty in which everything balances so perfectly between all 3 financial statements. Here is a simplistic summary of the 3 major financial statements and what they tell us;

The P&L shows you how much money you’ve made.

The Balance sheet shows you what your company is worth, and

the statement of cash flows shows you what you did with the money you made.

This is why it is so important to understand the other financial statements before you can really understand the statement of cash flows. This week’s video will show you what the statement of cash flows looks like in QuickBooks and help give you some insight into these relationships that I am talking about.