Cash flow statements are an important part of any small business. Regardless of your industry, knowing how to get the reporting right is important.

Managing cash flow requires you to have an intimate knowledge of what cash flow statements are and how they can guide your business. Fail to do so, and you might find yourself in hot water with the ATO. Worse, you may wind up needing to close your doors for good.

What is a statement of cash flow?

A cash flow statement is a key financial document that shows how much cash is flowing in and out of your business. The statement can be prepared on a monthly, quarterly, or yearly basis, and is generally used to monitor the health of your company.

There are three types of cash flows to keep in mind:

• Operating cash flow — This is the cash that flows in and out of your business as a result of day-to-day operations. It includes items like accounts receivable, accounts payable, inventory, and wages.

• Investing cash flow — This is the cash that flows in and out of your business as a result of investments, such as the purchase or sale of property, equipment, or stocks.

• Financing cash flow — This is the cash that flows in and out of your business as a result of financing activities, including the signing of loans, issuing stock, or repaying debt.

Monitoring cash flow statements is a large part of keeping your small business healthy and profitable. Since its primary purpose is to grant visibility into the health of a business, it should be consulted liberally on a regular basis.

For example, cash flow that is consistently in the green points to a business that has a strong understanding of where its finances are going. Cash flow with low or negative balances may suggest potential problems within the business or point toward inefficiencies somewhere else.

By tracking your inflows and outflows with a verified report, you can make informed decisions regarding your small business resources.