{"id":10770,"date":"2023-01-06T12:02:12","date_gmt":"2023-01-06T06:32:12","guid":{"rendered":"https:\/\/razorpay.com\/blog\/?p=10770"},"modified":"2025-01-03T15:30:04","modified_gmt":"2025-01-03T10:00:04","slug":"cash-flow-statement","status":"publish","type":"post","link":"https:\/\/razorpay.com\/blog\/business-banking\/cash-flow-statement\/","title":{"rendered":"Cash Flow Statement &#8211; How It Works and Why It&#8217;s So Important For Your Business"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">The Cash Flow Statement is a financial statement that offers a view of where cash is coming into the business and where it is being spent.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">What does a cash flow statement look like, and how can we read it to better understand the working of the business? This blog explains everything you need to know about the cash flow statement, with examples for better understanding!<\/span><\/p>\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_80 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-69e8cc184ddab\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-69e8cc184ddab\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/razorpay.com\/blog\/business-banking\/cash-flow-statement\/#What_is_a_Cash_Flow_Statement_CFS\" >What is a Cash Flow Statement (CFS)<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/razorpay.com\/blog\/business-banking\/cash-flow-statement\/#Why_Should_Founders_Know_CFS\" >Why Should Founders Know CFS<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/razorpay.com\/blog\/business-banking\/cash-flow-statement\/#How_Cash_Flow_Statement_Works\" >How Cash Flow Statement Works<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/razorpay.com\/blog\/business-banking\/cash-flow-statement\/#Cash_from_Operations\" >Cash from Operations<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/razorpay.com\/blog\/business-banking\/cash-flow-statement\/#Importance_of_Cash_from_Operations\" >Importance of Cash from Operations<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/razorpay.com\/blog\/business-banking\/cash-flow-statement\/#Cash_from_Investing_Activities\" >Cash from Investing Activities<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/razorpay.com\/blog\/business-banking\/cash-flow-statement\/#Importance_of_Cash_from_Investing_Activities\" >Importance of Cash from Investing Activities<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/razorpay.com\/blog\/business-banking\/cash-flow-statement\/#Cash_from_Financing\" >Cash from Financing<\/a><\/li><\/ul><\/nav><\/div>\n<h2><span class=\"ez-toc-section\" id=\"What_is_a_Cash_Flow_Statement_CFS\"><\/span><b>What is a Cash Flow Statement (CFS)<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">A cash flow statement helps summarize the movement of cash and cash equivalents in and out of the business.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">It shows how much cash is coming into the business and from which source. It also shows where this cash is being spent, and the final amount of cash left with the business at the end of the accounting period.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">It is one of the three main financial statements used to understand how a business is performing. The other two are the Income Statement and Balance Sheet.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">While the Income Statement provides insight into the profits and losses of the business, the Cash Flow Statement gives a deeper look into how the money that was earned is being spent.\u00a0<\/span><\/p>\n<p style=\"text-align: center;\"><a style=\"border-radius: 3px; background: #528FF0; padding: 15px; font-weight: 600; cursor: pointer; text-decoration: none; color: white;\" href=\"https:\/\/razorpay.com\/x\/?r=blog_cta_business_banking_cash_flow_statement&amp;utm_source=blog&amp;utm_medium=cta\" data-schema-attribute=\"\">Explore RazorpayX!<\/a><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Why_Should_Founders_Know_CFS\"><\/span><b>Why Should Founders Know CFS<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Founders are responsible for making most, if not all decisions pertaining to the business. As long as a founder is fully aware of his business\u2019s financial position, making these decisions is easy.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Cash Flow is the single most important factor that determines a business\u2019s success. If inflow of cash is not more than the outflow of cash, the business runs at a loss \u2013 if this persists for a while, the business is likely to collapse.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Learning how to read your business\u2019s Cash Flow Statement is very important, especially for businesses in nascent stages. Startups and small businesses have very high expenses, and this shows on the Cash Flow Statement.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Being able to read and understand your business\u2019s Cash Flow Statement means you will be able to pinpoint where your business is spending too much, or too little money. Once you\u2019ve pinpointed the problem, you\u2019ve already solved half of it!<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"How_Cash_Flow_Statement_Works\"><\/span><b>How Cash Flow Statement Works<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">A Cash Flow Statement is divided into three categories.<\/span><\/p>\n<ol>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Cash from operations<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Cash from investing activities<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Cash from financing<\/span><\/li>\n<\/ol>\n<p><span style=\"font-weight: 400;\">Each of these categories has cash inflows and outflows, shown as additions and deductions. Let\u2019s take a deeper look into each category.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Cash_from_Operations\"><\/span><span style=\"font-weight: 400;\">Cash from Operations<\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">This is the cash that a business generates or uses from regular day-to-day operations. For example, the cash that Razor Bakery generates by selling baked goods will be its cash from operations.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">When cash from operations is positive, the business has generated more cash than it spent, and vice versa if cash from operations is negative.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Cash from Operations is calculated by adding non-cash items and changes in working capital to the net income for the accounting period.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Let\u2019s break that down.\u00a0<\/span><\/p>\n<p><b>Net income<\/b><span style=\"font-weight: 400;\"> is the total money earned by the business by selling goods or services.\u00a0<\/span><\/p>\n<p><b>Non-cash item<\/b><span style=\"font-weight: 400;\"> is any expense that does not include actual cash being exchanged. A good example is depreciation. Depreciation is the reduction in the value of an asset over time. There is no actual cash being lost, but it is still counted as an expense.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">To understand <\/span><b>changes to working capital, <\/b><span style=\"font-weight: 400;\">let\u2019s first understand what working capital is.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Working capital is current liabilities deducted from the current assets of the business. Current Assets are the most liquid assets of the business, like cash and cash equivalents. Current Liabilities are the most liquid liabilities of the business, like accounts payable.\u00a0<\/span><\/p>\n<p><b>Read more: <\/b><a href=\"https:\/\/razorpay.com\/learn\/business-banking\/balance-sheet\/\"><b>Balance Sheet<\/b><\/a><\/p>\n<p><b>Changes to working capital <\/b><span style=\"font-weight: 400;\">would be any cash item that increased or decreased the working capital over the accounting period.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">For example, let\u2019s say Razor Bakery purchased a cookie-baking oven for Rs 20 lakh in cash. The oven is an addition to the business\u2019s fixed assets, and the money spent would be a deduction from current assets.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Since there is a deduction to current assets and no change to the current liabilities side, this would be recorded as a change to working capital.\u00a0<\/span><\/p>\n<p style=\"text-align: center;\"><a style=\"border-radius: 3px; background: #528FF0; padding: 15px; font-weight: 600; cursor: pointer; text-decoration: none; color: white;\" href=\"https:\/\/razorpay.com\/x\/?r=blog_cta_business_banking_cash_flow_statement&amp;utm_source=blog&amp;utm_medium=cta\" data-schema-attribute=\"\">Explore RazorpayX!<\/a><\/p>\n<p><span style=\"font-weight: 400;\">Any transaction that causes an equal change on both the current assets and current liabilities side would <\/span><b>not <\/b><span style=\"font-weight: 400;\">be recorded as a change to working capital.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">For example, let\u2019s say Razor Bakery received cash from accounts receivable. There would be an addition to cash (current asset) and the exact same value deducted from accounts receivable (current liability). Since the net effect of the transaction is zero, it will not be counted as a change to working capital.\u00a0<\/span><\/p>\n<h3><span class=\"ez-toc-section\" id=\"Importance_of_Cash_from_Operations\"><\/span><span style=\"font-weight: 400;\">Importance of Cash from Operations<\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400;\">Cash from operations is an important metric to understand the basic functioning of your business.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Every business relies on sales of goods or services to fund its operations \u2013 without a reliable stream of revenue from sales, no <a href=\"https:\/\/razorpay.com\/learn\/what-is-a-business-model\/\">business model<\/a> is sustainable. Positive cash from operations is crucial to any business\u2019s survival.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Cash from Operations is a more realistic view of how much cash your business is actually generating \u2013 net income as shown on the balance sheet does not include non-cash items and changes to working capital.\u00a0<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Cash_from_Investing_Activities\"><\/span><span style=\"font-weight: 400;\">Cash from Investing Activities<\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Through the course of business, money is also spent on making investments in the growth of the business. This could include buying fixed assets, acquiring other valuable businesses, and investments in marketable securities like equity and bonds.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">For example, Razor Bakery wants to sell its old cookie-baking oven to make room for the new one. The sale of this machine would be included as an addition to the cash from investing activities section of the cash flow statement.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Let\u2019s say Razor Bakery also wants to start selling beverages with its baked goods \u2013 it then chooses to acquire a popular beverage business. This acquisition would be included as a deduction in this section.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">This would be included as a capital expenditure or capex. Generally, capex is a negative cash flow, since purchase of fixed assets means that cash is flowing out of the business.\u00a0<\/span><\/p>\n<h3><span class=\"ez-toc-section\" id=\"Importance_of_Cash_from_Investing_Activities\"><\/span><span style=\"font-weight: 400;\">Importance of Cash from Investing Activities<\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400;\">Investing activities ensure the future growth of your business &#8211; when Razor Bakery decided to buy the beverage business, it took a step towards expansion and reaching a wider market.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Buying a new cookie-baking oven is also an investment into the future of the business because it will help Razor Bakery bake more cookies in less time \u2013 improving efficiency and increasing profitability.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">It is normal for new startups to have a very high capex, resulting in a significantly negative balance in the cash from investing activities. This is because new businesses are spending a lot of money on starting operations.\u00a0<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Cash_from_Financing\"><\/span><span style=\"font-weight: 400;\">Cash from Financing<\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">This category includes the flow of cash from funding the company \u2013 capital invested by banks, the founders, and other investors.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Items under this category could include<\/span><\/p>\n<ol>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Long-term debt<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Payment of dividends<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Repayment of long-term debt<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Issuance of equity<\/span><\/li>\n<\/ol>\n<p><span style=\"font-weight: 400;\">Additions to this category include transactions that cause an inflow of capital into the business, regardless of the source.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Deductions from this category are essentially how much it costs to acquire this capital.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">For example, if Razor Bakery decides to take a term loan from XYZ Bank, it will be an addition to this category. Meanwhile, monthly interest payments towards this loan would be a deduction from this category.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">It is interesting to see how much money the business has to spend and how much it costs to get that money \u2013 especially for young startups when revenue from sales is usually not enough to keep the business running.\u00a0<\/span><\/p>\n<p>Wondering what&#8217;s the best way to manage your business&#8217;s money?<\/p>\n<p>You&#8217;re at the right place.<\/p>\n<p style=\"text-align: center;\"><a style=\"border-radius: 3px; background: #528FF0; padding: 15px; font-weight: 600; cursor: pointer; text-decoration: none; color: white;\" href=\"https:\/\/razorpay.com\/x\/?r=blog_cta_business_banking_cash_flow_statement&amp;utm_source=blog&amp;utm_medium=cta\" data-schema-attribute=\"\">Explore RazorpayX!<\/a><\/p>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>The Cash Flow Statement is a financial statement that offers a view of where cash is coming into the business and where it is being spent. What does a cash flow statement look like, and how can we read it to better understand the working of the business? This blog explains everything you need to<\/p>\n","protected":false},"author":106,"featured_media":10771,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"inline_featured_image":false,"footnotes":""},"categories":[27],"tags":[367],"class_list":{"0":"post-10770","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-business-banking","8":"tag-accounting-for-founders"},"_links":{"self":[{"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/posts\/10770","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/users\/106"}],"replies":[{"embeddable":true,"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/comments?post=10770"}],"version-history":[{"count":1,"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/posts\/10770\/revisions"}],"predecessor-version":[{"id":19885,"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/posts\/10770\/revisions\/19885"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/media\/10771"}],"wp:attachment":[{"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/media?parent=10770"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/categories?post=10770"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/tags?post=10770"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}