The cash flow statement

One of our jobs as financial directors is to train business owners and managers on the fundamental foundations of finance. By understanding the 3 different core statements/reports that make up a set of accounts – and the jargon that goes with them – you’ll become much more confident in your ability to translate the figures, and realise that accounts aren’t really quite as complex as they can first appear.

Over this next series of posts, we’ll explore the language you’ll come across in your accounting processes and the 3 key documents your finance department or accountant will put together for you to keep you updated on your position and prepare for annual filing.

Your cash flow statement is like your business’s  CCTV camera, as it shows you physically what cash has come in and what cash has gone out in that accounting period.

Small businesses don’t have to formally produce a cash flow statement, but larger businesses have a legal obligation to do so. That said, we advise smaller business to produce one as a matter of best practice, as they’re the ones most at risk of failing through a lack of cash.

The cash flow statement starts off with your profit figure, then shows all the things that create a difference between that profit number and the cash that you physically have sat in the bank.

Reasons for these differences can include:

Your profit shows sales you’ve invoiced for but you haven’t necessarily received all of the money because you have some debtors.

 If your debtors have gone up or down from last year it will vary the amount of cash coming in or out of your business.

Similarly with creditors – if you owe your suppliers more in this accounting period than you did last year, then this actually means that you’ve had less cash leave your business than would be showing in your profit calculation.

Depreciation – there will be years when you spend money on fixed assets where the cash leaves, but the profit calculation includes depreciation so it only includes a proportion of it. Then there may be subsequent years where you don’t spend the cash on the new asset, but you have included the appropriate proportion of the depreciation in the profit.

Money from investments or new shares being issued.

If you’ve paid off loans.

All of these things can vary your cash position relative to what you say you made as profit in that year – and this is why cash and profit are not the same thing!

Ultimately, you’re far more likely to go bust because you’ve physically run out of money rather than you are because you’re not making a profit. Obviously these things aren’t mutually exclusive: you can be losing money because you’re not making a profit, but it’s perfectly possible to be a profitable business that runs out of cash.

This highlights the importance of cash management, which is probably the most significant activity that any business can undertake. If you’re struggling due to lack of funds through non-payment of invoices for products or services you’ve provided, then you may want to consider invoice financing or factoring to help alleviate your cash flow problems. This is a way of selling your debt on so that you can recuperate some of the money but much faster than waiting for a payment you can’t afford to wait for!

Foundations of finance – quick recap


Over the last few posts, we’ve taken a look at jargon, principles and the three core statements or reports that make up a set of accounts – regardless of the size of your business, if you’re a limited company, then you’re legally required to file these accounts with Companies House every year.

These documents always come with a set of notes to explain how things have been calculated e.g. depreciation. The bigger the business, the more expansive these notes and the explanations will be.

If you require any further information or guidance to help you get to grips with the essential foundations of finance, drop us a line

or take a look at our training courses.

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