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Cash Flow Statements Explained

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Cash Flow Statements Explained

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For small business owners, a cash flow statement is a vital tool, revealing the actual movement of money in and out of your business, unlike a profit and loss statement. It highlights your liquidity and ability to meet immediate obligations, essential for making informed decisions and ensuring financial health. Learning to prepare and interpret this statement empowers you to identify shortfalls and manage your enterprise effectively.

Want to take control of your cash flow with confidence? At Clear Charge Solutions, we help small business owners simplify their finances with expert guidance and tools tailored to your needs. From understanding your statements to planning for growth, we’re here to support your success. Get in touch today and let’s build a clearer financial future together.

To assess a company’s financial health, you have to understand its cash flow statement. It reveals how cash moves through a business, including operations, investments, and financing activities. The cash flow statement highlights liquidity, showing whether a company can generate enough cash to sustain itself, invest in growth and meet its financial obligations.

Whether you’re an investor, business owner, or analyst, learning how to prepare, read, and analyze a cash flow statement will help you identify trends, spot red flags, and make informed financial decisions with confidence.

Key Takeaways

  • Cash flow statements are essential to understanding a company’s financial health.
  • They consist of three main sections: operating, investing, and financing activities.
  • There are two methods for preparing cash flow statements: direct and indirect.
  • Analyzing cash flow statements helps identify financial trends and potential problems.

Understanding Cash Flow Statements

The cash flow statement is a part of a company’s financial statement that tracks its actual cash movements, providing a clear picture of liquidity and its financial lifeblood. Unlike the income statement, which records revenues and expenses based on accrual accounting, the cash flow statement focuses on actual cash inflows and outflows, helping stakeholders assess a company’s ability to sustain operations, invest in growth, and manage obligations.

It complements the balance sheet by explaining changes in cash balances and reconciling non-cash transactions from the income statement to reveal how much profit actually converts into cash. By analyzing these activities, investors can identify trends, detect potential cash flow issues, and make informed financial decisions.1

Components of a Cash Flow Statement

The cash flow statement has three main sections: operating activities, investing activities and financing activities. Each segment provides a detailed breakdown of how cash is generated and used within a company over the stated period.

Operating Activities

This section of the cash flow statement shows how cash flows from a company’s core business operations, and whether the company can sustain itself without external financing. Cash inflows come from revenue, interest, and dividends. Cash outflows include payments to suppliers. employee wages, rent, utilities, and taxes.

Positive operating cash flow means a business is generating enough cash to cover expenses, whereas negative cash flow may signal inefficiencies in working capital.

Investing Activities

The investing activities section of the cash flow statement tracks cash movements related to long-term investments that affect a company’s growth. In this section, cash inflows come from selling assets, divesting subsidiaries, or collecting payments on loans. Cash outflows include capital expenditures (capex), investments in securities, and business acquisitions.

High capex can indicate expansion, but excessive spending without strong operating cash flow may strain liquidity. Conversely, frequent asset sales to generate cash might warn of financial distress.1

Financing Activities

This segment shows how a company raises and repays capital through debt and equity financing. In this segment, cash inflows come from issuing stock or borrowing, while cash outflows include loan repayments, dividend payments, and stock buybacks. Raising cash through financing can support expansion, but excessive debt without revenue growth may pose risks. On the other hand, consistent dividends and stock buybacks signal financial strength and a commitment to shareholder value.

Preparing a Cash Flow Statement

Creating a cash flow statement involves gathering relevant financial data, choosing a preparing method, and categorizing cash flows into operating, investing and financing activities. The general steps are as follows:

  • Step 1. Collect financial data: Collect the necessary data. This includes net income and non-cash expenses from the income statement, changes in assets and liabilities from the balance sheet, and bank statements to track the movement of cash.
  • Step 2. Choose a preparation method: There are two methods to prepare a cash flow statement—direct and indirect.
  • Step 3. Calculate cash flow from operating activities: If using the indirect method, begin with net income, add back non-cash expenses, and adjust for changes to working capital. If using the direction method, record actual cash inflows and outflows from customers, suppliers, and operating expenses.
  • Step 4. Calculate cash flow from investing activities: Next, identify any cash spent on capex from long-term assets. Additionally, record cash inflows from asset sales, divestitures, or loan collections from outflows for acquisitions or new investments.
  • Step 5. Calculate cash flow from financing activities: Include cash inflows from issuing stocks or borrowing funds. Deduct cash outflows from debt repayments, dividend distributions, and stock buybacks.
  • Step 6. Reconcile and validate the cash flow statement: Add operating, investing, and financing cash flows to determine net change in cash. Ensure that the ending cash balance matches the balance sheet’s cash account.
  • Step 7. Review and analyze: Look for negative cash flow trends that may indicate financial distress. Assess if operating cash flow is sufficient to cover investments and financing obligations. Identify unusual or inconsistent cash movements that may require further investigation.

Direct and Indirect Method

As mentioned previously there are two ways to build a cash flow statement: the direct method and the indirect method. Both methods yield the same net cash flow but they differ in presentation and the information required.

The direct method presents actual cash receipts and payments from operating activities. Instead of starting with net income, it lists cash inflows and outflows to core business operations. Alternatively, the indirect method starts with net income from the income statement and adjusts it for non-cash items and changes in working capital to arrive at cash flow from operations.1

Differences Between the Direct and Indirect Method

Direct Method

  • Approach: Lists actual cash transactions from operating activities
  • Transparency: Provides clearer visibility of cash movements
  • Use of Accrual Accounting Adjustments: Not required
  • Ease of Preparation: More complex, requires detailed cash tracking
  • Regulatory Preference: Preferred under International Financial Reporting Standards (IFRS) but rarely used
  • When Generally Used: Cash-heavy industries and when IFRS compliance is required

Indirect Method

  • Approach: Starts with net income and adjusts for non-cash items
  • Transparency: Less transparent but easier to prepare
  • Use of Accrual Accounting Adjustments: Required
  • Ease of Preparation: Easier, uses existing financial statements
  • Regulatory Preference: Accepted by IFRS and GAAP, widely used by companies
  • When Generally Used: Used by most companies, especially large corporations as it aligns with accrual-based financial reporting

Analyzing a Cash Flow Statement

By analyzing a cash flow statement, firstly with operating cash flow, investors can assess whether a company is generating enough cash from its core business, with positive operating cash flow indicating financial strength and negative signaling potential distress.

Additionally, investing cash flow shows how a company allocates funds for growth. High capex often indicates expansion, while frequent asset sales may indicate liquidity concerns. Moreover, financing cash flow reveals how a company raises and repays capital, with excessive debt issuance posing risks but steady dividend payments suggesting financial stability.

A strong company typically has positive operating cash flow, strategic investments, and balanced financing activities. On the other hand, cash burn, heavy reliance on debt, or frequent asset sales could indicate trouble.

Common Indicators and Red Flags

Strong indicators of financial stability include:

  • Consistently positive operating cash flow
  • Strategic capex
  • Balanced financing activities, such as debt repayments and shareholder returns

Red flags include:

  • Declining or negative operating cash flow
  • Excessive reliance on external financing
  • Frequent asset sales for liquidity
  • High cash burn rate

Generally, a company with strong free cash flow and sustainable debt management is in good financial standing, while persistent negative trends in cash flow indicate distress.

The Bottom Line

Altogether, a well prepared cash flow statement can greatly assist in analyzing a company’s financial health, ensuring that cash is being managed effectively, and identifying potential risks or opportunities. By scrutinizing the operating, investing, and financing cash flows, businesses can make informed decisions, investors can assess sustainability, and analysts can detect trends that might affect long-term performance.

Need help making sense of your numbers? Clear Charge Solutions is here to simplify your cash flow and strengthen your business. Let’s get you financially clear and confident—reach out today. Understanding your cash flow statement is the first step, and efficient business payment processing is key to keeping funds moving. Contact us today at (877) 847-4478 or check our IG for more information.

Reference: [https://www.investopedia.com/investing/what-is-a-cash-flow-statement/]

Top 20 Financial Resources for Small Businesses

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Running a small business is exciting, but financial savvy is crucial. Many resources offer guidance. Knowing where to find reliable support, whether for startups or established ventures, is key to success. Read on for 20 essential financial resources to empower your business.

Managing finances is one of the most crucial aspects of successfully running a small business. With so many tools, strategies and platforms available, it can be challenging to determine which resources will provide the most value.

To help simplify this process, leading experts from Forbes Finance Council share their go-to resources for navigating small business finance. From free online hubs to crucial financial strategies, these tools can help you get the most out of your capital and make informed decisions for your business.

1. Insurance Companies With Quick Underwriting Turnaround

Often, when small business owners seek financing, they are required to secure a life insurance policy to indemnify the debt. A handful of life insurance companies will provide a quick underwriting turnaround time on the policy to coincide with the loan approval process.

2. QuickBooks Online

Every entrepreneur needs solid financial information to make wise decisions. QuickBooks Online is the best tool for the job. It tracks income and expenses and generates detailed reports. With a user-friendly interface, seamless bank integrations and tax prep features, your financial management process will be much simpler, saving you time and ensuring you’re audit-ready, letting you focus on growing your business.

3. Intrafamily Loans

Look to the private individuals as well—family and friends. One can obtain an intrafamily loan from a family member and if the minimum AFR rate is charged, the transaction would not be a gift for gift tax purposes. Oftentimes, a parent uses this strategy to provide seed money for their children as they start their small business. The AFR rates can sometimes be more favorable than banks.

4. Business Credit Reports

Use the business credit report. Checking it frequently helps maintain credit health but also ensures the business is watching for signs of fraud or identity theft, like unauthorized accounts or fictitious business relationships. Small businesses and their owners can be lucrative targets for cybercriminals, as they often lack the advanced protections deployed by larger companies.

5. Cash Flow Management Tools

One go-to resource for small business finance that I always recommend is a good cash flow management tool. When I was starting my own business, cash flow management was one of the biggest challenges I faced. Finding something that automates your AR and AP can really make a difference in maintaining a healthy cash flow.

6. SCORE

SCORE offers invaluable resources like live and recorded seminars and a mentorship program to guide small businesses from setup to growth. It’s a go-to for learning and expert advice. The SBA website is another excellent resource, providing tools, funding options and guidance for small business success.

7. Banking Platforms

A banking platform can be a powerful resource and partner for small business owners. They need a partner that offers an array of services to streamline operations, as well as educational resources and peer insights to foster their unique growth. For entrepreneurs, that type of banking relationship is a golden ticket to success.

8. SBDCs

SBDCs are funded in part by the SBA and provide resources and support for small businesses, including assistance with financing. They are useful because they offer personalized, one-on-one counseling and can connect small business owners with local lenders and funding opportunities. – JD Morris, RHC 21 LLC (a SPE Fund) with family of Special Purpose Entities (SPE or SPV)

9. The Wall Street Journal

Quite simply, the Wall Street Journal—in its pages, contains a daily wrap-up of key events for business leaders. A quick 15-minute browse can and will be immensely impactful. Focus areas: Interest rates and FX influencing working capital or cash decisions and current events demonstrating direction on labor costs (particularly when hiring immigrants), inflation, tariffs, global trade and so on. I start daily with a quick read!

10. Short-Term And Long-Term Forecasts

One go-to finance resource we recommend to our small business clients is a solid short-term and long-term forecast. Reviewing your forecasts weekly and monthly, respectively, helps you to course correct or make agile, data-driven decisions to reach your long-term goals.

11. Fractional CFOs

I believe all small businesses should leverage a fractional CFO firm. I see many SMBs have full-time CFOs who are actually serving in the role of a high-level controller and with the experience that matches. A fractional CFO grants you access to talent who can provide strategic insight and guidance without the full-time expense.

12. Strong Relationships

Cultivating strong relationships is one of the best resources small business owners can lean on—whether it be with a banker who will guide you based on financial history, vendors who help improve customer experiences or other SBOs you can learn from based on their first-hand experience. These relationships become a trusted source for financial advice and strategies, leading to long-term success.

13. Subordinated Debt

Subordinated debt can be beneficial. Businesses with credit facilities might be limited—whether by their credit limit or by their lender—when requesting an over advance, but subordinated debt allows access to further capital. It’s revenue-based and doesn’t interfere with senior debt, so a company can quickly plug it into the equation if they need capital for a growth opportunity, operational challenge and so on.

14. Online Lending Platforms

Online lending platforms are a good resource, as they are quicker and cheaper to access. They also provide lending tools like payment calculators to help facilitate financing.

15. Working Capital From Tools And Partners

SMEs often overlook working capital provided by their suppliers, buyers and vertical SaaS tools. Many e-commerce and POS platforms offer cash advances. Likewise, major retail brands and OEMs like Puma and Foxconn partner with lenders to provide loans and factoring products. These options give small businesses faster, collateral-free access to capital compared to traditional banks.

16. Alternative Lending Marketplaces

Alternative lending online platforms provide real-time loan matching and transparent terms, eliminating the lengthy traditional bank approval process. Their pre-qualification tool helps business owners quickly understand their funding options without affecting credit scores. Alternative lending marketplaces offer small businesses access to SBA Loans, Equipment Financing, LOC, AR and more.

17. Invoice Factoring Platforms

Invoice factoring platforms allow businesses to convert outstanding invoices into immediate cash, improving cash flow without taking on debt. They’re particularly useful for businesses with long payment cycles, providing quick access to working capital to cover operational expenses or seize growth opportunities.

18. Information From Your Sales Pipeline

Your sales pipeline can divulge more information than many small businesses realize. Most competent financial officers use the company order book to determine financial health and forecast cash flow. The same can be said for the sales pipeline. Assigning a percentage chance of closing each deal, value, profit and month of closing can also help small businesses plan their cash flow.

19. Trade Credit Insurance

One go-to resource for small business finance is trade credit insurance, protecting businesses against the risk of default from customers while enabling access to cost-effective financing while suppliers can pass on their favorable financing terms to SBs, lowering their cost of capital. Protection and access to low-cost finance make credit insurance a vital tool for SBs seeking funding.

20. Kiva

While there are many great financial resources for small businesses, Kiva is a hidden gem. They offer crowdfunded microloans with 0% interest and no fees. It’s especially useful for entrepreneurs who lack access to traditional funding.

Don’t let financial complexities hold you back! We’ll help you explore effective credit card payment options to streamline transactions and boost your customer base. Contact us today at (877) 847-4478 to discover how our credit card processing services can transform your business. Check our IG for more information.

Reference: [https://www.forbes.com/councils/forbesfinancecouncil/2025/01/22/20-go-to-resources-for-small-business-finances/]

The Advantages of Accepting Credit Card Payments

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Accepting credit cards offers several benefits for businesses. Understanding the advantages can help businesses make informed decisions about their payment methods. Read on to learn more about why accepting credit cards can be a worthwhile investment. Have questions? We have a  great team that can walk you through all your items!

Retailers face various challenges with accepting credit cards. Accepting credit cards is generally seen as positive for a business’s growth, but it can pose an assortment of issues for business owners.

In many ethnic communities, cash is a preferred payment method over credit cards. Therefore, cash payments will always be an ideal fallback for those who don’t have access to credit or are too young to qualify for their own credit cards. But payment with cash can be limiting in how much a customer will spend per visit. Some stores offer an ATM machine on premises for convenience, but the customers who don’t qualify for a credit card may also not have funds to withdraw.

With many credit card companies, each time a customer swipes, they get mileage, cash-back and other rewards. The store owner typically pays the processing fees with each transaction. In a store with high processing volume, it can be very costly for retailers to process credit cards.

Another concern about accepting credit cards is the increased risk of fraud and credit card theft. Credit card companies offer customers fraud protection and have been making great strides in developing chip and other verification technology for credit card use. Store owners are not as protected from fraudulent card payments, and may be held liable. For a small business owner, this can hit hard and paralyze their business. Credit card fraud impacts online retailers in a significant way. Retailers will pay around $130 billion in digital CNP (card-not-present) fraud between 2018 and 2023. Exercising extra precautions, many cashiers ask for an accompanying ID before accepting credit cards, and online payment systems are constantly adding extra layers of security and verification.

However, the proven benefits of accepting credit cards far outweigh the challenges. Accepting credit cards and displaying credit card logos near your point of sale system at the checkout counter increases your business’s legitimacy. Customers trust their credit card brands, and that trust inherently transfers to you, the merchant, who accepts this payment form. A reputable credit card processing company helps protect you and your customers from data breach and identity theft. Accepting credit cards can boost your sales and keep your business on an even playing field with competitors. When you open up payment methods beyond traditional cash to include credit and debit cards, your potential customer base and their purchasing power broadens. Your competitors are likely accepting credit cards for customers’ convenience. To stay profitable and competitive, you need to offer the same.

Credit cards encourage impulse buying and improve your cash flow. Shoppers like being able to check out quickly and easily without having to write a check or make an extra trip to the ATM (which limits their purchasing to only their available funds). An MIT study indicated that customers tend to spend an average of 83% more when they’re paying with credit cards. This includes a high rate of impulse purchases. Credit card transactions are processed and verified electronically, and settled quickly. Proceeds are typically deposited the next business day, or sometimes even same day, into your bank account. You won’t have to handle as much cash, reducing theft and security concerns in your store. You won’t have to worry about bounced checks or wait for checks to clear. This also means no more sending out invoices and waiting for customers to pay. If you are an e-commerce merchant, accepting secure payment by credit card is imperative. The majority of transactions on the internet are paid for with credit cards or online systems such as Paypal, which link to credit cards.

Convenience and safety are top priorities. Most banks offer debit and/or credit cards to account holders, with fraud protection guaranteed. Cardholders can enjoy access to credit for spending without fear of theft. Storing and toting around cash carries an increased risk of theft. Shoppers are often in a rush. Paying with a credit card is convenient and quick, with not having to pull cash out and start counting it for payment. Many credit cards offer points, mileage, cash-back and other rewards as incentives for the cardholder to use credit cards.

Compared with the tangible benefits to your bottom line, accepting credit cards is relatively inexpensive for businesses. Credit card processing is a highly competitive industry with many different offerings. Most merchant services providers assess retailers an affordable, percentage-based processing fee, plus a flat-rate amount per transaction. Some offer a surcharge or cash discount program with one low monthly flat fee (and no separate transaction fees) to help store owners recoup these fees. It’s important to use an honest, transparent processing company to avoid hidden and surprise charges. Many companies purport to offer a great deal but unfairly and unethically catch unsuspecting customers with fees and surcharges.

It is easy to start accepting credit cards. Filling out an application costs nothing and can take just a few minutes, with approval within a day or two. The application process can take less than 24 hours, and some companies provide free equipment with no long-term commitment or early termination fee. Fast approval and quick setup can have your business running more smoothly within just a few business days. Most companies offer no-obligation quotes with rate plans that are profitable for your business and flexible, based upon sales volume. They may ask you to provide a current statement so they can show you how they can save you money over your current rates. A unique industry concept that is becoming popular is a cash discount and/or surcharge program, with which store owners can recoup processing fees by passing along fees to customers who pay by credit card while offering a reduced price for customers paying with cash. A little bit of research goes a long way in finding the perfect credit card processing solution for your business.

Ready to expand your payment options and better serve your customers? Our flexible payment options enhance customer satisfaction and boost sales. Contact us today at (877) 847-4478 to discover how our credit card processing services can transform your business. Check our IG for more information.

Reference: [https://www.forbes.com/councils/forbesbusinesscouncil/2020/01/27/accepting-credit-cards-why-its-worth-it/]

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