Understanding your cash flow statements Te mārama ki ō tauākī kapewhiti

This shows the comings and goings of cash related to your core business – for example, cups of coffee sold if you run a cafe, or call-outs and fit-outs if you’re a plumber.

Your cash flow statement works out net operating cash flows from these types of line items:

• cash from customers
• cash paid to suppliers
• cash paid for operating expenses
• changes in inventory
• changes in accounts receivable
• interest paid
• tax paid.

If your net operating cash flow is negative, you’re not earning enough to cover costs. 

Cash from customers is like revenue on your income statement, but is adjusted for non-cash items – for example, accounts receivable.

Employee wages can be cost of goods sold and operating expenses on the income statement – it depends on your business model. On the cash flow statement, wages are adjusted for changes in holiday pay that hasn’t been paid yet.

Cash paid to suppliers is like costs of goods sold on your income statements, but it doesn’t include non-cash items – for example, accounts payable.

How to improve your operating cash flow

This shows the comings and goings of cash if you buy and sell:

• shares in the financial market
• land
• intellectual property.

It also includes any one-off sales of a long-term asset, for example a work vehicle. Cash flow statements for small businesses don’t always include net investing cash flows, so this line may not appear or say ‘nil’.

When you buy or sell long-term assets, you’ll see it on the cash flow statement. You can also find long-term assets on the balance sheet.

This is the cash you get from taking out a loan, and the cash your business spends on dividends or repaying long-term debt.

Net financing cash flow is the total cash remaining after all transactions related to financing are tallied. It’s likely to be a negative number if you pay dividends or pay off a loan or other debt.

You can look at the net change in cash to see the trend of cash flow over the period – if it’s increasing or decreasing. It’s the difference between the opening and closing balances.

Check if this has increased or decreased each time you get this statement.

If your closing balance is positive, it shows your business can do one or more of these things:

• grow
• reduce debt
• carry out its day-to-day activities without sinking into unplanned debt
• pay dividends to investors.

If your closing balance is negative, your business can’t cover costs with earnings from this time period. 

The opening and closing balance show your cash balance at the beginning of the period and the end – for example, the first and last day of the month. You can also find your cash balance on the balance sheet as a current asset.

One or two cash flow statements with negative net change in cash might just mean your business is going through a period of growth. 
But several statements in a row with negative net change in cash is a cause for concern. 

Talk to your accountant about possible reasons. It’s commonly down to late payments from customers or suppliers – you can fix this by invoicing promptly, and politely reminding people before and soon after your payment deadline.

This is the total of the statement’s:

• cash flows from operating
• cash flows from investing
• cash flows from financing
• opening cash balance (closing balance from previous cash flow statement).

This then becomes your opening cash balance on the next period’s cash flow statement.