How do you use a cash flow statement to assess your business performance?

1 Understand the components

A cash flow statement has three main components: operating, investing, and financing activities. Operating activities are the core transactions that generate revenue and expenses for your business, such as sales, costs of goods sold, salaries, taxes, and rent. Investing activities are the purchases and sales of long-term assets, such as equipment, property, or securities. Financing activities are the changes in your debt and equity, such as loans, dividends, or share issuances. Each component shows the net cash inflow or outflow from that activity.

2 Calculate the net cash flow

The net cash flow is the difference between the total cash inflow and the total cash outflow for each component and for the entire period. It indicates how much cash your business has generated or used in that period. A positive net cash flow means that your business has more cash coming in than going out, while a negative net cash flow means the opposite. You can calculate the net cash flow by adding or subtracting the cash inflow and outflow for each component and for the entire period.

4 Adjust for non-cash items

Non-cash items are transactions that affect your income statement but do not involve cash, such as depreciation, amortization, or accruals. They can distort your cash flow statement and make it difficult to assess your business performance accurately. To adjust for non-cash items, you need to add back or deduct them from your operating cash flow, depending on whether they increase or decrease your net income. For example, if you have a depreciation expense of $10,000, you need to add it back to your operating cash flow, because it reduces your net income but does not affect your cash.