The Statement Of Cash Flows is broken up into 3 sections and it is important to understand what these sections are telling us about the company. Very often clients ask me when they made (eg $140K) net income why isn’t there $140K in the bank. The answer is always found by looking at the Statement Of Cash flows. As you will see in the video one common reason is the owner pulled the earnings out of the company. The business owner will usually disagree until we double click the owner draws on the statement of cash flows to drill into the details and QuickBooks will then show us a list of all of the checks written which make up that change in the owner draws account from the Equity section of the balance sheet which is also shown in the “Investing Activities” section of the Statement Of Cash Flows. The Statement Of Cash Flows is broken down into 3 sections as follows;
Cash Flows From Operating Activities
Cash Flows From Investing Activities
Cash Flows From Financing Activities
Operating Activities – very simply put these are cash flows from running the day to day operations of your business. It starts with the accrual basis net income and then looks at the changes in balance sheet accounts having to do with operations such as Accounts Receivable and Accounts Payable. These are examples of collections and payments resulting from the day to day operations. On accounts receivable have we billed more than we collected during the period? If so then Accounts Receivable went up and this has to be deducted from net income to arrive at cash. This is a result of the operations of our business so it is found in this section of the Statement Of Cash Flows. The best way to start getting the picture of what this looks like is to start running the report in QuickBooks by going to Reports -> Company and Financial -> Statement Of Cash Flows. Analyze this report and see which accounts show up in the Operating activities section to get an idea of what belongs there. Think it through. Look at each account that shows up in this section and think about what it has to do with “Operations”.
Investing Activities – You will find the Fixed Asset accounts in this section. This is a good example because when we purchase major equipment we are making an investment in our company. That equipment is depreciated and that depreciation is a paper expense that we do not see coming out of our bank account. The Original purchase is all that ever comes out of our bank account and it does so entirely at the time of purchase. So the purchase of the equipment has to be subtracted from net income to arrive at cash while the depreciation has to be added back.
Financing Activities – This is where we see the owner draws and generally any changes in accounts from the Equity section of our balance sheet. If the owner has drawn money out of the business this represents money that came out of our bank account that was not reflected in net income. Therefor it has to be deducted from net income to arrive at cash.
Net Cash Flow – At the very bottom of the Statement Of Cash Flows is a short reconciliation. We total up all of the net cash flows and add that to the beginning cash balance for the period to arrive at the ending cash balance. This of course has to match the ending cash balance for the period on the Balance Sheet. This relationship is really important to understand when we want to create our projected statements. Everything has to flow and balance between the Balance Sheet, P&L, and Statement of Cash flows.
Cash Flow Projections – In order to do a proper Cash Flow Projection you have to project the actual statement of cash flows which of course means you have to do a projection of all three major financial statements. Anything which does not include all 3 of these statements leaves us with an incomplete picture of the company.
If you would like to learn how to do the cash flow projections properly using all 3 major financial statements from your QuickBooks File so that you can have a great tool to manage your business with then visit the events section of our website and then either sign up for the live webinar or download the recording here.