What is the cash flow statement (and why it matters)

If your home-grown business plan financial model is super tripped out with tons of drivers and interlocking financial statements, you can pat yourself on the back and skip over this blog post.

If, on the other hand, mapping out your financial projections and then explaining them is your biggest fear as an entrepreneur, there is hope!

One of my favorite job functions as a financial modeler at Masterplans is talking through a client’s financial statements with them and giving them confidence to answer investor or bank questions in meetings. For clients that aren’t very financially fluent, it’s fun to go through each table one at a time and help them make sense of it all. (We also have a cheat sheet that clients often find handy.)

Over the next series of finance-related blog posts, I’ll attempt to impart some high-level clarification about some financial statements to increase your comfort level. Let’s begin with a common question: What is a Cash Flow Statement? 

• What it shows you: Unlike the Profit & Loss statement, which determines projected profits based on accounting rules for revenue and expense recognition, a Cash Flow Statement shows your expected money in the bank.

• What secrets are hidden within: You’ll find gems like asset purchases, cash from new loans, loan principal repayments, additional investment, and dividends.

• What you should be on the lookout for: In your business plan financials, you’ll want to see positive cash flows in the near to intermediate term and positive cash balances throughout. Ideally, cash balances will exceed a few months’ worth of your projected operating expenses so that any unexpected variances won’t leave you scurrying for additional funding.

• What Cash Flow wizards can extract from it: You can take projected future cash flows and plug them into a net present value calculator to see what your business could be worth today.

So the next time someone asks you, "What is a Cash Flow Statement?" you'll have the answer.