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3 July 2020  -  Accounting Business Tax

Money is flowing down the river

Cashflow is a major factor in the success of any business, driving every day operations, expansion and purchasing power. Businesses must fully understand the flow of cash in to and out of their business

We try to make our articles light hearted; funny if we can (insert knock, knock joke here). Maybe it’s writers block, but I was struggling this time. It could have been because I had just read that 95% of business owners do not know how to read a simple cash flow. 95%!

A cashflow statement is the flow of money into or out of a business. An unvarnished story. A financial statement of the business.

Let’s take ABC Limited as an example. Once upon a time their cash flow looked like below:-


2016 2015
Cash at Start of Year 50,000 100,000
Total Cash Flow From Operating Activities 30,000 -40,000
Total Cash Flow From Investing Activities -160,000 -260,000
Total Cash Flow From Financing Activities 85,000 250,000
Change in Cash and Cash Equivalents -45,000 -50,000
Cash at End of Year 5,000 50,0000

There are three important parts of a company’s financial statements:

  • the balance sheet;
  • the income statement; and
  • the cash flow statement.

Completing these at least monthly and at the end of the financial year will give you a real understanding of your businesses financial health.

Financial statements are a company’s way of telling a story. Business owners need to learn a few simple steps to decode the story, and “ta-da” it’s possible to read them easily.

The balance sheet gives a one-time snapshot of a company’s assets and liabilities and the income statement, is a tale about how much profit the company made. Your cashflow will show you whether all those delightful revenues booked on the income statement have actually been collected and it is another story that business owners need to decipher.

Rivers always flow downhill, right? Well think of your cashflow statement as a story of how much liquid (cash) you have flowing from the top to the bottom. This is what it is all about; gauging liquidity — or cash on hand — so that you can make smart decisions about paying bills and buying additional assets or inventory.

The cash flow statement measures the movement of money from three different activities — operations, investments, and financing: Operations Costs + Asset Investments + Financing = Cash on Hand

Operating Costs

This section of the cash flow shows how much you have spent or made on a daily basis, including cash received from debtors, paid to creditors and cash tied up in stock.

2016 2015
Cash at Start of Year 50,000 100,000
Operating Activities
Net Income 8,000 90,000
Adjustments To Net Income
Inventory -25,000 -10,000
Net Receivables -10,000 5,000
Accounts Payable 50,000 50,000
Deferred Taxes 2,000 0
Other 5,000 5,000
Total Cash Flow From Operating Activities 30,000 -40,000


Investing Activities

This section shows the cash used to sell or buy long-term fixed assets for your business. These assets may be equipment, property, machinery, vehicles, furnishings, or securities. Over time, you want to see that the business can pay for these investments with income from its operations.


2016 2015
Investing Activities
Capital Expenditures -100,000 -150,000
Business Acquisitions -50,000 -100,000
Other -10,000 -10,000
Total Cash Flow From Operating Activities -160,000 -260,000


  • Financing Activities


This section records sources of finance for the business. Here you’ll find the cash received from or paid to lenders, other creditors, and investors (if you have them).


2016 2015
Financing Activities
Dividends Paid 0 0
Sale/Purchase of Stock 0 0
Net Borrowing 85,000 200,000
Other 0 50,000
Total Cash Flow From Operating Activities 85,000 250,000
Change in Cash and Cash Equivalents -45,000 -50,000


Cash at Year End 5,000 50,000

What you see when you look at a river, though, is not the whole story – the river is flowing even where you can’t see it. It is for this reason business owners need to understand the difference between cash and profit.

Think of it like this – It’s the day before payday, and your bank account is almost empty. You make enough money to cover the bills each month, so in business terms you are “profitable.” But until that next pay day your bank will tell you the river is empty – “transaction declined.”

That is the difference between cash and profit. There is often a disconnect between when you earn money and when you actually receive the funds in your account.

Profitable companies can run out of cash, and companies with plenty of cash can be unprofitable so it’s vital that business owners keep a real time eye on their cash flow and management information – it can tell you about a company’s health, especially when it is read with the other two main financial statements. For businesses to be successful, cashing coming into the business should be from trading activities!

Magic Beans provide affordable, real time information for businesses. You can ensure you have enough cash to run your business, without having to hire full time resource. For further assistance or with any queries, please contact Magic Beans, 02895072700,