Financial reports can provide valuable information as to how your business has performed over a given period, its financial stability and its cash position.

Accountants tend to refer to financial reports as ‘statements’ and the formal accounting reports comprise three core financial statements.

  • the balance sheet (sometimes referred to as the statement of financial position);
  • the income statement (sometimes referred to as the profit and loss statement);
  • the cash flow statement

These three statements are a set and are all needed for the full story.  Therefore, to read one or two without their companion reports is a mistake.  All three contain different information and, together, tell the full story of the:

  • financial position (balance sheet);
  • financial performance (income statement); and
  • cash management (balance sheet and cash flow statement)

for the same trading period.

Having an understanding of accounting is vital to business success

The cash flow statement tells how the business used and generated its most important asset – cash.  Cash management is just as important as being able to generate profit.  The cash flow statement tells the story of cash in and cash out of the business under three separate sub-headings.

Cash flow from operations (trading or carrying out the core business including managing accounts receivable and payable and inventory).

Cash flow from investing (buying and selling non-current assets (e.g. building new premises or selling equipment)).

Cash flow from financing activities (raising or repaying equity or long-term debt).

The cash flow statement can be examined in isolation but it’s also good to compare the cash flow statements across the two years.  The observations can trigger questions like:

Why is cash flow decreasing?

Are the new assets contributing to the operating capacity of the business?

Sometimes a business may pay off long term debt but then end up with an overdraft and overdrafts are generally a more expensive form of debt than a loan facility.

A business owner should observe and perform these sorts of analysis to learn more about what is going on in their business from a financial perspective.