The Cash Flow Statement is the third financial statement that summarizes the cash flows coming in and out of your company.The Cloudberry Cash Flow Statement utilizes the Indirect method.
The statement begins with Net Income (from the Profit and Loss Statement), after which we add changes in your Assets, Liabilities, and Equity (from the Balance Sheet) to arrive at the actual cash flows of the company.
You can't directly edit this statement, as it merely displays the changes you have made elsewhere on your Financial Statements. To demonstrate how this works, let’s look at examples that impact the Cash Flow Statement.
The first part of the Cash Flow Statement is called Operating Activities. It is divided into two sections: Net Income (which is just redisplaying the same Net Income from your Profit and Loss), and Adjustments to Net Income.
First, the Cash Flows Statement pulls in your company's Net Income from the Profit and Loss Statement.
Every time you make a change in your financial model that impacts your Net Income, you'll also see the change reflected here.
Adjustments to Net Income
Next, we attempt to "adjust" the Net Income to understand the actual cash flows in and out of the company. For example, you might have just started servicing a new customer and recognized their revenue on your Profit and Loss statement. But what if they haven't paid yet? We need to make an adjustment for that in order to accurately reflect your cash flow.
Examples of Adjustments to Net Income
- Deferred Revenue What if a customer pays you for a year of service in advance? What’s the impact on cash?
- Prepaid Expenses. What if you pay a vendor for a year of service in advance?
- Changes in Credit Card Balance. These expenses were counted in your PnL, but if you haven’t actually paid out the credit card balance yet, you’ll need to account for it in your cash flows.
Any payments related to your company’s investments are your Investing Activities. These can be small, such as employee computers, or large, such the acquisition of another company.
You’ll also see non-cash expenses such as Depreciation in this section. For example, you might be capitalizing your R&D expenses instead of displaying them in your PnL. This R&D spend would show up as a growing asset in your Balance Sheet, from where it gets picked up and displayed in your Cash Flow Statement. Since it’s an asset you purchase by paying money for it, you’re going to display it as a negative cash flow under your Investing Activities.
Examples of Investing Activities
- Purchases of Computers & Equipment
- Goodwill (acquisitions)
Payments to and from investors, banks, and shareholders are your Financing Activities. Typical examples are investments from venture capitalists or angels, loans, or loan repayments.
Examples of Financing Activities
- Loans & loan payments
- Convertible notes
- Employee option exercises
- Loan payments
Net Cash Increase (or Decrease)
Finally, we tie it all together at the bottom. The Net Cash Increase (or Decrease) is the sum of your Operating, Investing, and Financing Activities. Whether it is an increase or decrease depends on whether you have a positive or negative cash flow.
Did you know?
Net Cash Increase or Decrease for any given month is the same amount as the difference between the total end-of-month bank balances.