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Cash flow statement: How to use this financial statement

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Of the three core financial statements, the cash flow statement is perhaps the least understood, and therefore under utilised by small business owners.

However, it paints an important picture that the others cannot: how much money your business brought in, and where it was spent.

In this article, we’ll explain exactly why this is important, the terms you need to know, and how to read one, so you can start using this statement to make informed business decisions.

Here’s what we cover:

What is the cash flow statement?

Also known as the statement of cash flows, this statement illustrates how your business operations are performing.

Simply put, it reports the cash inflows and cash outflows within your business during a time period, whether that’s over a week, a quarter, or a financial year.

It also shows you the net increase or decrease in cash, and explains the causes for the changes in the cash balance.

The cash flow statement recognises three major business activities for cash flow:

  • Operating activities
  • Financing activities
  • Investing activities.

It’s important to note that cash flow is different from profit, another useful measure of performance.

This is why a cash flow statement is generally used alongside the two other types of financial statements: the balance sheet and the profit and loss account (also known as the income statement).

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There are two methods of calculating cash flow: the direct method and indirect method.

Direct method

The direct method uses the transactional information that impacted cash during the period.

For example, to calculate the operating activities’ section using the direct method, you’d take all cash collections from operating activities, and subtract all of the cash payments from the operating activities.

This is simple to do for small businesses that are using the cash method of accounting.

Indirect method

The indirect method depends on the accrual accounting method, in which your accountant records revenues and expenses at times other than when cash was paid or received.

Instead of organising transactional data like the direct method, your accountant will start with the net profit number found in the profit and loss account and make adjustments to undo the impact of the accruals and non-cash expenses (such as depreciation) that were made during the period.

Why is the cash flow statement important?

As we mentioned above, the profit and loss account includes non-cash transactions as well as accruals, so the role of the cash flow statement is to show pure cash movements for the period.

The cash flow statement measures how well your business manages its cash position.

This means it gives you a picture of how well the business generates cash to pay its debt obligations and fund its operating expenses.

The statement not only shows you how much money was spent, but where it was spent, giving more context to information that might not be apparent on the other financial statements.

Therefore, a cash flow statement is vital for forecasting future cash flows and explaining anomalies such as why the business is in a poor cash position but has high profits.

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The sections of the cash flow statement

A cash flow statement is broken up into three sections:

  • Cash flow from operating activities
  • Cash flow from investing activities
  • Cash flow from financing activities.

Let’s look at each section in the order they appear on the statement.

Cash flow from operating activities

This is the cash used in your everyday business operations.

In other words, this section reflects how much cash is generated from your products or services.

Cash receipts include the sales of all goods and services as well as other operating income such as rent, interest, and commissions received.

Cash payments are all the costs of running the business such as salaries, inventory purchases, transport costs, interest expense, and taxes.

Cash flow from investing activities

Cash from investing is the money spent on growing the business through long-term capital investment as well as the cash proceeds from selling those investments.

For example, if you buy physical assets (such as equipment) or non-physical assets (such as patents).

Cash receipts include sale of investments, sale of fixed assets, and sale of business segments.

Cash payments include the purchase of fixed assets, purchase of investments, and purchase of securities in another company.

Cash flow from financing activities

Cash from financing is funding that comes from you as an owner, investors and creditors.

Cash receipts include borrowed funds from investors, banks and other financial institutions in the form of a mortgage, business loan, bonds, and so on.

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Cash payments include dividends paid to shareholders.

How to read the cash flow statement

The number at the bottom of the cash flow statement will tell you the net cash movement for the time period, also known as net cash flow.

If the net is a positive number, then cash increased over the period.

If the number is in brackets then you had negative cash flow, i.e. the business spent more than it received.

Negative net cash flow shouldn’t automatically raise an alarm without further analysis. You can determine where the cash inflows and outflows occurred by reviewing the three sections above.

For example, you could have a positive operating cash flow and a negative investing cash flow, which would generally be positive for the future because it means the business is making money and then using it to grow.

Look for trends across multiple statements over time and identify areas of strong performance as well as opportunities for improvement.

Ideally, your cash from operating activities should routinely exceed your net profit, because a positive cash flow speaks to your ability to remain solvent and grow your operations.

If your operational cash flow is negative, you can start to investigate areas where cash flow is a potential problem.

Take accounts receivable, for example. Is it taking too long for your customers to pay you?

Cash flow statement vs balance sheet vs profit and loss account

The profit and loss account, like the cash flow statement, shows changes in accounts over a set period of time.

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The balance sheet on the other hand, is a snapshot showing what the business owns and owes at a single moment in time, i.e. it tells you what value your business holds at that moment.

The profit and loss account is important because it summarises your business revenues, costs and expenses, so you can ultimately understand if you were profitable.

And while profitability is an important financial measure, the cash flow statement exists to provide you with a true reflection of the cash movements during the period.

This is why to get an overall picture of your business health and performance, you need to look across all three financial statements.

Final thoughts

Your cash position determines so many of your business decisions, such as whether you can afford to expand operations, whether you need to adjust inventory levels, or whether you need to chase outstanding debtors.

Therefore, the cash flow statement is a vital tool in your toolbox.

Only this statement can tell you how well you are managing your cash position.

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Exclusive: Biden opens the possibility of more offshore oil drilling in the Gulf of Mexico – TalkOfNews.com

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Biden opens the possibility of more offshore oil drilling in the Gulf of Mexico

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An oil and gas drilling platform stands offshore as waves churned from Tropical Storm Karen come ashore in Dauphin Island, Alabama, October 5, 2013.

Steve Nesius | Reuters

The Biden administration released a five-year offshore oil and gas drilling development plan on Friday that would block all new drilling in the Atlantic and Pacific Oceans within U.S. waters, but would allow some lease sales in the Gulf of Mexico and the south coast of Alaska.

The proposed plan, which has not been finalized, could allow up to 11 lease sales over the next five years. It also includes an option for the administration to conduct no sales. The Department of the Interior is inviting the public to comment on the program.

Biden had vowed to suspend all new federal drilling on public lands and waters, but that position resulted in legal challenges from several Republican-led states and the oil sector.

As U.S. energy prices rise, the fossil fuel sector has urged the administration to increase offshore drilling in an effort to lower gas prices at the pump. But climate groups have argued that new lease sales would exacerbate climate change while doing nothing to bring down prices.

A recent report published by Apogee Economics and Policy said that a temporary suspension in new offshore oil and gas sales would have minimal impact on gas prices for consumers — with prices edging up by less than 1 cent per gallon over the next nearly two decades.

“From Day One, President Biden and I have made clear our commitment to transition to a clean energy economy,” Interior Secretary Deb Haaland said in a statement on Friday. “Today, we put forward an opportunity for the American people to consider and provide input on the future of offshore oil and gas leasing.”

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The Interior’s most recent offshore oil and gas auction was in November in the Gulf of Mexico. A court order later vacated the sale, arguing the administration didn’t adequately account for the harm to the environment and impact on climate change.

Nearly 95% of U.S. offshore oil production and 71% of offshore natural gas production occurs in the Gulf of Mexico, according to the Natural Resources Defense Council. Roughly 15% of oil production in the U.S. comes from offshore drilling.

Environmental groups on Friday condemned the administration for proposing limited new lease sales instead of announcing a ban on all new drilling.

“The Biden administration had an opportunity to meet the moment on climate and end new offshore oil leasing in Interior’s five-year program,” said Drew Caputo, vice president of litigation at Earthjustice. “Instead, its proposal to serve up a bunch of new offshore oil lease sales is a failure of climate leadership and a breach of their climate promises.”

Environmental groups have also argued that new leasing would impede the White House’s goal to slash carbon emissions by at least 50% by 2030 in an effort to keep global warming under 1.5 degrees Celsius.

“This draft plan falls short of what we desperately need: an end to new oil and gas drilling in federal waters,” Food & Water Watch Executive Director Wenonah Hauter said in a statement. “President Biden has called the climate crisis the existential threat of our time, but the administration continues to pursue policies that will only make it worse.”

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Exclusive: This Simple Exercise Will Help You Turn Failure Into Success – TalkOfNews.com

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This Simple Exercise Will Help You Turn Failure Into Success

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If you want your business or your career to be a big success, rather than focusing only on the positive, you should also look closely at your failures. In fact, you should write those failures up and create a “rejection resume.” That advice comes from Eli Joseph, Ph.D., faculty member at Columbia University and Queens College and author of The Perfect Rejection Resume.

A rejection resume is straightforward to create, as he explains in his book. Ask yourself the same questions you’d answer in a traditional resume–but in reverse. Instead of saying where you graduated from, list the schools you applied to but didn’t get into, or the ones you dropped out of, or the courses you failed. Instead of listing the jobs you succeeded at, describe the ones you were fired from, the projects that crashed and burned, and the biggest mistakes you made. The result will be a brief document, a few pages long or maybe just one page, that contains a record of your biggest disappointments, and the biggest mistakes you’ve made.

What’s the purpose of the rejection resume? “Most people do not like to talk about their failures and how many organizations rejected them or how many venture capitalists rejected their proposals,” Joseph explains. “So it’s just a conversation starter.” That is, it can help you start a conversation with yourself. “To say, hey I have this document, and I can take advantage of these lessons.”

Here are some ways a rejection resume can benefit you.

1. It can help you turn current failures into future successes.

“As you’re building a business, you can write down, ‘I failed today at this task, and it was partially detrimental for now, but I’ve learned from my mistake.’ And look around as you go along.” With this approach, the rejection resume can become a powerful motivational tool, he says, because if you look at your failure, you may be able to see the mistakes that led you there. And you can choose not to make those mistakes in the future.

2. It can let you see how far you’ve come.

Anytime is a great time to create a rejection resume, Joseph says, but it’s an especially useful thing to do if you’ve suffered a disheartening setback. “It’s the one that stings a little bit, and you know, that’s what we need to harp on and focus on. So we can bookmark that time that we felt down from a particular failure, but we’ve rebounded.”

His comment makes me think about my attempt, decades ago, to work as a business reporter for a daily newspaper, the only job from which I’ve ever been fired. I hated the job and was actually delighted to leave it, but it also felt like a colossal failure. With hindsight I can see that it was completely the wrong fit for me and how losing that job was in many ways a piece of very good luck.

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3. It will help you connect with others.

“People always love a comeback story,” Joseph says. You may prefer to focus on your successes, but in fact, you almost certainly have your own comeback story and your own history of failure before success, he says. “And people always love that. They love the underdog.”

This is why, he says, if you share part of your rejection resume story on social media, it’s likely to get a lot of attention. “It’s a good marketing tool,” he says. “People who do speaking engagements and keynotes tend to reel the audience in through their personal endeavors and how they’ve overcome failure.” The rejection resume can help you organize that information so you can help others learn from your experiences, he said.

There’s a growing audience of Inc.com readers who receive a daily text from me with a self-care or motivational micro-challenge or tip. (Interested in joining? Here’s more information and an invitation to an extended free trial.) Many are entrepreneurs or business leaders and many have told me about how even devastating failures have helped lead them build bigger, more meaningful successes. Seeing your failures as something to be commemorated in a rejection resume can be a great start.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.

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Exclusive: Mystery rocket makes moonfall – TalkOfNews.com

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Mystery rocket makes moonfall

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Hello and welcome back to Week in Review, where we recap the biggest stories from the week. If you want this in your inbox every Saturday, sign up here.

Greg Kumparak is still on vacation, but not to worry! He’ll be back at the helm next week to bring you our biggest stories. Until then, I’ve got you covered.

First for some quick business. TechCrunch+ is having an Independence Day sale, which gets you 50% off on an annual subscription. Need more? TC+ Editor-in-Chief Alex Wilhelm gives you all the reasons to take the plunge here.

Okay let’s go to the moon! Yes, the moon. Some space junk crashed to the lunar surface this week, causing some enthusiastic observers to scratch their heads. Was it from SpaceX? Was it from a rocket launched in 2014 by the China National Space Administration? We still don’t know, but Devin Coldewey had a chat with Darren McKnight from LeoLabs, which has built a network of debris-tracking radar, to get some more insight.

Image Credits: NASA/Goddard/Arizona State University

other stuff

Speaking of space: Ever want to stare longingly into the depths of the universe and actually have something stare back? This is supposed to happen in two weeks when the James Webb Space Telescope will release its first images. “This is farther than humanity has ever looked before,” NASA administrator Bill Nelson said during a media briefing this week. Maybe the truth is out there.

Tesla Autopilot layoffs: The automaker this week laid off 195 employees across two offices in its Autopilot division. Those who were laid off filled supervisor, labeler and data analyst roles. Questions persist about what impact the layoffs will have on Tesla’s wider advanced driver assistance system. The remaining 81 staffers on the Autopilot team will be relocated to another office, as the San Mateo office will be shuttered.

SPAC subpoenas: A New York-based federal grand jury sent subpoenas to the board of Digital World, which is preparing to acquire Trump Media & Technology Group, Donald Trump’s media group responsible for Truth Social. According to an SEC filing, the subpoenas are an effort to gather more information about “Digital World’s S-1 filings, communications with or about multiple individuals, and information regarding Rocket One Capital.”

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Deepfake job apps: The FBI this week issued a warning that deepfakes are being used along with stolen information to apply for jobs. A part of this even involves video interviews. “In these interviews, the actions and lip movement of the person seen interviewed on-camera do not completely coordinate with the audio of the person speaking. At times, actions such as coughing, sneezing, or other auditory actions are not aligned with what is presented visually,” the FBI said in a statement announcing the disturbing news.

Party pooper: Welp, that 2020-era indefinite ban on unauthorized parties at Airbnbs is now permanent. This means no open-invitation parties and no parties whose attendance exceeds 16. The company said in a blog post that since they instituted the ban 2 years ago, there was a 44% year-over-year decrease in the rate of party reports. There will be no partying on, Garth.

Human And Artificial Intelligence Cooperating Concept

Image Credits: DrAfter123 / Getty Images

audio stuff

Over on the TechCrunch Podcast Network, Christine Tao, founder of Sounding Board, joined Darrell and Jordan on Found to talk about difficulties she and her co-founder faced while fundraising and how they established the customer type that made scaling possible.

And on the Wednesday episode of Equity, Natasha Mascarenhas asked a question inspired by a recent post penned by TC’s own Rebecca Szkutak: What’s in the fine print for term sheets these days, and what does that tell us about who is going to be in control during the downturn?

Check out our full roundup.

added stuff

Want even more TechCrunch? Head on over to the aptly named TechCrunch+, where we get to go a bit deeper on the topics our subscribers tell us they care about. Some of the good stuff from this week includes:

The SEC rejected bitcoin spot ETFs again. Now what?
The SEC’s decisions aren’t a first for the industry; the government agency has denied over a dozen bitcoin spot ETFs in the past year alone while approving several bitcoin future-based ETFs, Jacquelyn Melinek reports.

Disclose your Scope 3 emissions, you cowards
Tim De Chant takes on the companies that claim they’re serious about carbon emissions. In short, if they’re serious, then they’ll estimate their Scope 3 emissions and not undermine attempts to make Scope 3 disclosures standard.

Pitch Deck Teardown: Wilco’s $7 million seed deck
Haje’s back with another pitch deck teardown, this week from Wilco, a company whose funding he covered last week. He is pretty excited about Wilco’s deck, as, he says, it’s 19 slides that tick all of the boxes.

Image Credits: Wilco (opens in a new window)

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