Bike Shop Management

Best Practices for Reading Your Cash Flow Statement

Tips for Reading Your Cash Flow Statement

The cash flow statement (also referred to as the “statement of cash flows”) shows the cash generated and used during a specified period, such as ‘For the fiscal year ended January 31st, 2018’.

The cash flow statement shows how your company will be able to pay for its operations and generate growth. It is important in analyzing the liquidity and solvency of your company.

Because the income statement (P&L) shows activity using accrual accounting, the cash flow statement converts those figures from the accrual basis of accounting to cash. Accrual basis accounting records revenue and expenses when they are earned, not when the cash is received. So to get to a true picture of cash in and out, you need to create the cash flow statement.

The cash flow statement is one of the three required financial statements. For info on the other documents, check out the links below:

First, a quick review of the cash flow statement

The cash flow statement breaks up your cash usage into the following groups:

Operating activities

Investing activities

Financing activities

Operating Activities

This section shows the cash from your company’s sales minus any cash needed to make those sales. Essentially, it’s the cash coming in and going out during your normal business operations.

But because Net Income on the income statement (P&L) is affected by some non-cash items like depreciation, those need to be included in the calculation to get to cash flow from operations. This converts items on the income statement (P&L) from accrual basis to cash.

Cash flow from operations = Net income +  depreciation/amortization +/- one-time adjustments +/- change in working capital

Investing Activities

This section lists any investment related cash flow and reports the purchase and sale of long-term investments and capital expenditures like equipment and buildings.

Financing Activities

This section reports any changes to your company’s stock and payment of dividends.

Now you’re ready to calculate your cash flow summary:

+/- Cash flow from operating activities

+/- Cash flow from investing activities

+/- Cash flow from financing activities

= Net change in cash

+ Beginning cash balance

= Ending Cash

The net change in cash should tie back to the balances reported on your balance sheet.

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Some helpful ways to analyze the cash flow statement

1. Free Cash flow

Free cash flow is the excess cash produced by your company. Investors like to see free cash flow as it shows the ability to pay debt and grow your business.

Free cash flow = net income + amortization/depreciation – changes in working capital – capital expenditures

2. Net Income vs. Cash Flow from Operating Activities

In comparing the net income to the cash flow from operating activities, look for any disparities. If your net income is much higher than the cash flow, there may be an issue that needs looking into.

Remember: Always look at your P&L alongside the balance sheet & cash flow statement

Without comparing the P&L to other financial statements (the balance sheet & the statement of cash flows) it is hard to see the full picture of your business.

As you continue to operate your business, keep these ratios and tips in your analysis toolbox so you can maintain control of your profitability.


As a Business Consultant for Bike Shops across the country, Matt is available to talk to independent bike dealers about overcoming their challenges every day. 

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