Your statement of cash flows tells you where the money is coming and going, from operations, investing, and financing.
Too often business managers only look at the income statement when they’re trying to evaluate the health of their business. They’re looking to see, “Oh, did I make a profit? Were revenues greater than my operating expenses?” And they tend to forget to look at the Cash Flow Statement, which is actually really important because, as they say, “cash is king.” Now the Cash Flow Statement is going to be broken out into three components. You’ll have cash flow from operations, cash flow from investing, and cash flow from financing activities.
The cash flow from operations is going to be basically your income with adjustments. For example, did you actually receive all the revenue you received over your accounts receivable? Did you actually pay all your vendors, or are there accounts payable? You also will want to recognize the cash flow from investing. Did you buy equipment? The cash that you spent on equipment is not going to show up on your income statement. So you want to see where the money is coming and going in your business, if it’s going to the purchase of equipment. Perhaps you took on new investors, or you borrowed money. So when you look at your bank account you say, “Oh! I’m rich! I have $100,000.” But in fact, the money came from a loan that you took out. So it’s really important to look at the statement of cash flows to see where the money is coming and going to understand why your bank balance is showing what it shows.