Healthy signs in the cash flow statement

Many startup businesses will be formed on the basis of a great idea for a product or service. However, for some SME owners it can be a daunting task moving beyond that initial idea and dealing with the daily tasks of operating a business.

Understanding your cash flow is one aspect of determining where money is circulating in your business. However, it's also good to have an understanding of how successful your cash flow operations are and how you can work to optimise your current activity.

Below are four signs you should look out for next time you review your cash flow statement, as discussed by Chron.com.

The cash flow statement's sections

Your cash flow statement will be separated into three different sections; operating activities, investment activities and financing activities. Each section is then split up into the cash inflows and outflows, otherwise known as the money gained and spent during the period of report. If your inflows exceed your outflows for a particular section that means you made a positive net cash flow for the activities of that section.

Positive cash flow from operating activities

The cash flow from your operating activities will indicate the amount of money spent and received on your businesses core operations. Generally speaking, a healthy business will consistently generate a positive cash flow from its operating activities as this section considers the payments made from customer receipts. Suffering a net loss from your operating activities is far from ideal as you may need to continuously rely on outside financing to keep your business afloat.

Consistent investment activity

Your investment activities refer to cash used or acquired for investing in long term assets such as equipment or land. In most cases a growing business will generate a negative net cash flow from investments as they look to acquire more assets and grow their business. Ultimately, positive cash flow from operating activities will dictate your spend and cash flow in your investment activities.

Conservative use of financing

The financing section of your cash flow will refer to how you finance your business. Cash inflows will refer to new financing that has been issued and outflows will consider the financing that has been paid off in the period of the statement. A negative net cash flow from financing activities will indicate a healthier business as this displays you have allocated more money paying off previous loans than you have received for new ones.

Generally speaking your cash flow will showcase how money is currently being spent by your business and will also help you determine how money can be used for the future. Your operating activities should always be the first point of reference as a strong positive performance in this section will ultimately determine how you investment and finance activities are affected in your next statement.

Want to prepare prior to your cash flow statement? A good cash flow forecast will help you allocate funds in line with how you expect your business to perform.

 

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