Every business should have a general idea of what their cash flow actually looks like in a way that makes sense. In determining this, you will see as a business owner what cash you actually have available after loans and obligations. A couple of methods are used to figure this out. One method, called the direct method is a method whereby you group (1) cash flows from operating activities , (2) cash flows from investing activities and (3) cash flows from financing activities, netting each out in their respective group. The difference is your net increase or decrease in your cash and cash equivalents. Adding your cash and cash equivalents from the beginning of the year to this number will give you what your cash and cash equivalents are for the end of the year.
If you decide to use the indirect method, you will group them in the same groups although you will begin with your net income figure and net out the groups from the net income number instead and add your net increase in cash and cash equivalents to your cash and cash equivalents at the beginning of the year to come up with your cash and cash equivalents number at year end.
Again, your statement of cash flows shows what your company's cash inflows and cash outflows are from your operating, investing, and financing activities. It is a useful tool for looking at the strength of your cash in your business operations.
Copyright Jeanine Pfeiffer