Operating activities include all the regular day-to-day business transactions you perform. For example, if you sell products or services, this would be called revenue (or sales). And if you purchase products or services for your business, this would be called expenses.
The most common categories of operating activities include:
- Revenue from customers - These are sales of products or services to consumers, businesses, or other organisations
- Cost of revenue - This is the cost of the goods sold or services rendered. It includes the costs that go into producing your products, such as raw materials and labour, along with any other direct costs associated with creating your product or service
- Gross profit - The difference between revenue and cost of revenue is gross profit, which represents your margin (or profit) on each sale. You can break down gross profit into two categories: direct costs and indirect costs.
Investing activities include:
- Purchasing fixed assets like equipment or buildings
- Paying off loans
- Selling off assets like equipment or buildings
- Making any other investments in your company that aren't part of your everyday operations
In other words, the investing activities section shows how much money you spent on longer-term assets such as property, plant & equipment (PP&E), or other companies.
For example, if a company buys new computers for its employees, that would be recorded as an investment expense. On the other hand, if a company sells some PP&E it previously owned (or pays off some debt), that would also show up as an investing cash inflow.
Financing activities show how a company raises capital and pays it back to investors through capital markets. Some of the most common financing activities also include:
- Issuing stock or bonds: Used to raise capital for the business. When a business issues stock or bonds, it sells ownership shares in itself or debt obligations.
- Paying dividends on preferred stock: Some companies issue preferred stock that pays dividends at regular intervals (usually quarterly). Similar to paying interest on bonds, except that preferred stockholders typically have more substantial rights than bondholders do.
- Paying interest on debt: Debt financing allows companies to borrow money from banks or bondholders and pay them back over time with interest added to each payment amount.
How cash flow statements can help your business
A cash flow statement is helpful for many reasons, including forecasting future earnings potential and identifying areas to improve profitability through cost-cutting measures. A company's ability to generate positive cash flows from operations is often essential when lenders evaluate loan applications or lines of credit from banks.
In addition, investors who want to gauge whether a company's earnings reflect operational efficiency may look at its operating cash flows and net income figures on its income statement to see how consistent they are over time. A cash flow statement can help determine whether a business is financially solvent.
Four practical use cases of cash flow statements
Understanding the different uses of cash flow statements is crucial for effective financial management. These statements, pivotal in revealing a business's liquidity, offer invaluable insights for various stakeholders.
Decision making for management: Cash flow statements help management make informed decisions. For example, if a company's cash flow from operations is consistently positive, it indicates healthy liquidity, enabling expansion or new investments. On the other hand, a negative trend might signal a need for cost-cutting measures.
Investor Assessment: Investors use cash flow statements to gauge a company's financial health. Positive cash flow indicates that a company is well-positioned to generate returns, making it a more attractive investment proposition.
Lender Analysis: Banks and creditors often use cash flow statements to determine a company's creditworthiness. Consistent positive cash flow suggests a company can meet its debt obligations, thus lowering credit risk.
Internal Planning and Forecasting: These statements assist in business forecasting. By understanding cash inflows and outflows, companies can better plan for future financial needs, ensuring they maintain adequate cash reserves.
For businesses looking to streamline their financial processes, our expense management solution and company cards offer real-time visibility into cash flow, making tracking and managing these crucial financial aspects easier.
Capture the right spend data for your cash flow statement
One of the biggest challenges for finance and accounting teams is capturing all transactions that impact the cash flow in and out of the business. This process requires a robust company card and expense management solution (to capture expenses in real-time) and great integrations with accounting software to show exactly what is available.
Payhawk's spend management solution, including company cards and expense management software, helps CFOs and financial leaders get insight into the cost of doing business by showing spend in real time and correctly assigning it to an appropriate category.
Some of the key benefits of Payhawk's spend visibility include:
- More accurate data – Expense management solutions don't always respect the timing difference between expense and payment, which means they don’t always reflect your company’s actual cash position. This strategy can make it difficult to accurately track and report on your company’s true cash position. Payhawk’s integration strategy however, is built in accordance with the accruals principle and respects both dates.
- Better management – If you don't have good visibility into your spending habits, it can be challenging to make informed decisions about where to allocate resources for maximum impact – especially if you don't know what types of expenses contribute most to costs and profits.
- Demonstrate your performance against plan – By comparing actual vs. planned spend by category, you can show how well you manage working capital and ensure that you are controlling expenses as planned. This process will help improve confidence among investors and lenders, which is critical for any business seeking external funding, such as venture capital or bank loans.
Demonstrative trackers for success: An overview
Cash flow statements are essential for your financials. They show us how well a business uses it's cash and how healthy its operations are. A good cash flow analysis will tell you if a company can pay its bills on time and if it has enough cash to sustain operations in the future.
A company might look profitable, but if it can't generate enough cash from its business activities, then it's in trouble. The balance sheet tells us how much money a company has, but the cash flow statement tells us how much it's actually getting from its operations.
Learn how to make better business growth decisions with our all-in-one expense management tool. Book a demo today.
