Episode 48: Where Did the Money Go? Understanding Your Statement of Cash Flows

  📍 Welcome to the Creative Minds Smart Money Podcast, where we turn financial confusion into creative confidence. I’m Samantha Eck, bookkeeper and fractional CFO for creative entrepreneurs. Each week I’m sharing my financial expertise and actionable strategies to help you build a thriving creative business. Plus, you’ll hear from industry experts who bring fresh perspectives on growing your business beyond the numbers. Because building a successful creative business starts with strong financial foundations. Your next chapter starts now.

 You are listening to the Creative Mind Smart Money podcast, and today I want you to raise your hand, even though I can’t see you, if you’ve ever had a great month and still wondered where did all my money go? That is exactly why the statement of Cashflow Matters, and today we’re looking at our third most important report, the statement of cash flows.

We’ve talked about the profit loss, we’ve talked about the balance sheet. We’ve talked about those two in combination with each other. Now we’re adding in that third report that we need to look at. We’re doing that deep dive into the statement of cash flows. So most business owners only focus on profit, but profit is only one part of the financial picture.

We already know that. We know that revenue’s one part. We know that profit is one part. We know that equity’s one part, but another part of that is cash. The cash flow statement shows you exactly what happened with your money, not just what you earned. It shows you what went on with your business and how you can actually utilize that money to grow your business.

So let’s deep dive into this statement of cash flows. So you’re probably asking me like, what the heck is the statement of cash flows? What actually is it? Why do I need to look at it?

First of all, it’s one of those three core financial reports that we need to look at along with the p and l, the balance sheet. It shows you where cash came from and where it went over a specific period of time. So usually we’ll look at it on a monthly basis and say, okay, our cash went here and now our cash is here on a monthly basis.

And of course it’s broken down into three different sections. So you have your operating activities, which is your day-to-day income and expenses, your investing activities, which is your big. Purchases your equipment or any long-term investments that you make, and then your financing activities, which are loans, owners draws, and credit card payments.

So those are your three categories and where the three areas that you’ll see usually on your statement of cash flows. A lot of times as creative service providers, we don’t see them investing activities, but we see the operating and we see the financing. So let’s take a look at what each of these sections is and go into them in a little bit more detail so that we can fully help you understand the statement of cash flows when you’re looking at it.

Okay, so first of all, at the very top with your operating activities, you’re gonna see your net income. So your net income is that bottom line number that you had from your profit and loss, and it usually should match your profit and loss in any given month. So if your net income was $10,000, it’s going to show you your operating activities, which is the cash in and out of your core business operations.

Things like client payments received. So if you had AR credit card payments, things like that. Subscriptions, payroll, utilities. This section is, if this section is negative long term, it’s a red flag. So it’s really just showing us what went out of our business for operating activities.

So you wanna see that top net income and then what made the change in that after expenses, this is what everything that happened after all those expenses, it’s not gonna show you all those expenses ’cause that’s what your, your profit loss did.

Then you have your investing activities and not everybody’s gonna see this. It’s where you’re buying or selling assets, so equipment, computers, et cetera. It can be negative temporarily, which is often a sign of growth or reinvestment or something like that. And it’s not always a bad area because of course you could be investing in a new software, new computer equipment, new buildings, whatever it is.

So it’s gonna show up there in your investing activities, especially if it is something, some sort of investment. And then of course you have your financing activities, so cash in and out of loans. Repayments. Owners’ pays. Owners’ draws. It’s really helpful for tracking how much you’re pulling from your business versus what you’re reinvesting because too many draws and loan repayments can equal a cash drain.

Then at the bottom, what you’re gonna see is either a net cash increase or a net cash decrease. So you’re gonna have your, what your starting cash was and what your cash at the end of the period was, and if you obviously brought in a lot of money, it’s gonna show you like what you. Have at the end of the day there, like how much your cash has increased.

So now when we’re looking at this, we’re asking ourselves why does cash flow matter more than profit? First of all, profit is an accounting concept, like profit is what we talk about in accounting. But cash is real. Like cash is what’s in your bank account. So I don’t know if you’ve ever read the Profit First book, but in the book he talks about how he goes to his accountant at the end of the month and his accountant says, Kay, you made like $50,000 in profit.

And he asks them like, where is that? Well, it’s already spent, like you’ve already spent that money. So, it’s an accounting concept. Cash is what you actually have in your bank account and what you actually have at the end of the month so you can still show a profit and still be broke because your money is either tied up in receivables, it’s tied up in debts, or you paid it through expenses, some, somewhere along the line.

Cashflow really does tell you if your business is healthy, not just looking good on paper. So if you’re seeing that net cash increase all the time, that’s showing that your business is healthy, that’s showing that you have money left in your bank account. And cashflow issues are one of the number one reasons that most small businesses fail.

Similar to how we did it in the balance sheet, I wanna talk about some like really dos and don’ts. So positive profit, but negative operating cash flow is something that we wanna watch out for because when we have too many adjustments to cash flow, it can cause really big issues in the long run. And we can start hemorrhaging cash.

We don’t wanna rely on financing or credits to cover everyday expenses. So What I was talking about, YNAB like if you’re gonna have a credit card, you need to make sure that you’re paying it off, not just having it outstanding and then constantly pulling owner’s jobs with no cash cushion. This is such a danger, and I know I talk about an emergency fund all the time, but again, this is where I’m talking about how I want you guys to survive the statistics and really last past any other business.

If you don’t have a buffer and you don’t have some way of covering yourself when your expenses are eating up your funds, you’re gonna get in so much trouble. So having a cash cushion of at least three to six months is so important. And then having delayed client payments with no follow-up system.

I’ve seen it too many times where people who don’t have monthly recurring revenue, maybe they have clients that they stand out invoices for, they’re not following up with those people. And you need to follow up with those people and get those payments ’cause you’re owed that money.

So then there’s some things that I see that we are totally fixable, which is not budgeting for taxes or large expenses. ’cause those are gonna show up on there. So you wanna make sure that, those are all accounted for and properly tracked that we’re not tracking loan repayments or credit card payments.

You wanna make sure that you’re actually tracking those. I have seen people track credit card payments on their profit and loss, and it doesn’t go through your profit loss. Guess your balance sheet and then it should show up in your statement of cash flows. And if it doesn’t show up there, then something is off.

Remember, a credit card payment and a loan repayment is not a transfer. It is a payment. And then of course. Overspending and not seeing a cashflow reality. So if you’re not looking at your cashflow and understanding your cashflow, you’re gonna overreach yourself. And we never want that to happen because cashflow is the lifeblood of your business.

Yes, you can have a profit, but you can still be broke on the back end.

Okay, so at the end of the day, how do we use our statement of cash flows? First of all, again, you need to review it monthly along with your balance sheet and your p and l. Use it to time investments and plan for taxes and evaluate how much you can pay yourself safely. So you should be able to look at your statement of cash flows at any point in time.

Like you can look at it this month to date, you can look at it there and actually see it in action again, as long as your bookkeeping is updated. And then look for trends. Are you improving month over month or are you burning through your cash? Like really, really quickly. And of course. One of the other things you can do is if you have a bookkeeper, make sure they’re actually explaining the report and not just sending it to you.

The way I like to describe it is if your bookkeeper can’t explain your profit or like your statement of cash flow to you, then they should probably not be showing it to you because your statement of cash flows is one of those statements that actually needs to be like walkthrough. It can’t just be like, oh, here, here’s your statement of cash flows, because you’re not actually gonna understand it just by looking at it.

And that doesn’t mean they’re a back bookkeeper. It just means like either they show it and they explain it, or they don’t show it at all because it’s a very confusing report and you can get very confused by it very, very easily.

📍 So as a final takeaway, similar to what I did for the balance sheet, the p and l tells you what you earned. The cash flow statement tells you what you can actually spend if you want to run a sustainable business, start tracking cash flow, not just you know, the score of your business or anything else. You wanna make sure that you’re tracking your cash flow and understanding your business in that manner.

Otherwise, again, if you found this episode useful, please leave a review and share it with a friend. Otherwise, I wish you. All the best and we’ll see you next week. Farewell fellow Travelers.