What is a Cash Flow Statement: Everything You Need to Know

You have some pretty important decisions to make in how you run your own ecommerce business. Should you sell on Shopify or Amazon? Are you considering selling your products on credit? Do you want to offer your customers the option to make monthly installment payments? Should you use AI accounting and AI bookkeeping?

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However, with 82% of small businesses failing due to poor cash flow management, none is more important than making sure you have enough cash on hand to pay your expenses or make investments necessary for growing your business. This is the fundamental principle of ecommerce accounting and ecommerce bookkeeping.

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Knowing how much income is coming in and out of your company is crucial to understanding your financial health. It is worthwhile to note that cash flow for an ecommerce business is very different than it is for traditional bricks and mortar stores.

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What is the Cash Flow Statement?‍

The Cash Flow Statement is one of three major financial statements used to show a company's financial health, together with the balance sheet and the profit and loss statement.

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Used to show cash transactions over a specific period of time, usually monthly, quarterly, or annually, the cash flow statement includes cash and cash equivalents such as undeposited funds and checking and saving accounts, and shows if cash has come into the company, or has been paid out.

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The cash flow statement is broken down into 3 parts:

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1. Cash flow from operating activities –  Shows your purchase and sale of goods, as well as other operational activities.

2. Cash flow from investing activity – Shows your purchase and sale of long-term assets.

3. Cash flow from financing activities – Shows your capital raised, dividends paid, ecommerce loans and lines of credit such as Shopify Capital, PayPal Credit and the repayment of such loans, and the issuance of shares.

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Cash Flow Basics‍

Cash flow is the amount of money coming in or out of a company. It is a primary indicator of financial health, showing how efficiently you are running, and your ability to pay your bills and make investments necessary to support your growth.

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Being cash flow positive indicates your ability to pay your short-term debts. However, being cash flow negative is indicative that you have more debt than income, and that you will have a hard time paying your bills unless you raise more capital.

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You need to know your cash conversion cycle in order to understand your cash flow.

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As there are rarely any physical assets to use as collateral for debt financing,

many ecommerce businesses expect a negative cash flow for the first few years while the brand is building itself up and growing its consumer base. For this reason, startups need to raise a lot of capital in the early stages of development because they can't finance the company themselves.

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Cash Inflow and Outflow

Any income from sales of goods and services, or sale of assets converted into cash are cash inflows. Cash used to pay expenses or purchase investments, materials and goods are cash outflows.

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There are fixed and recurring cash flows, and one-time cash flows. Recurring cash flows are typically predictable.

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A recurring positive cash flow would be money regularly paid by customers to your company to purchase your goods and services, such as if your Shopify store has monthly subscription fees paid by customers every month.

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A recurring negative cash flow would be repeating expenses such as payroll or monthly subscription payments.

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One-time positive cash flow would be the sale of equipment or land, and a one-time negative cash flow would be the purchase of land or payments made as a result of a lawsuit.

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A company always aims to have more recurring positive cash flow than recurring negative cash flow.

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How to Create a Cash Flow Statement

In creating a cash flow statement, it is important to understand the differences between the direct and indirect methods.

The Direct Method

Most ecommerce businesses use the direct method which simply lists all the cash inflows and outflows during a specific period. Cash from customers, payroll, loans, investments, utilities, and supplier payments are all noted line by line in a direct cash flow statement. For businesses managing their books on a cash basis method, the cash flow statement and the profit and loss statement will look the same.

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The Indirect Method

Using the indirect method, determining the company's net profit on an accrual basis is the starting point and can be easily found in the profit and loss statement. The indirect method looks at the company's net profit, and then adds back noncash expenses, such as depreciation, and not cash revenues, such as sales in credit, into the net income balance.

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As noted, the indirect method is only relevant if you account for amounts accrued but which have not yet been realized, such as accounts receivable (money earned but not yet received) and accounts payable (amounts owed but not yet paid).

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At Finaloop, we create real-time, on-the-go cash flow statements using both methods. This helps our businesses track their cash flows, regardless of the accounting method they decide to use. Through our 100% accurate, cash-flow analysis report for DTC and ecommerce brands, you can see your real-time accrual or cash P&L, balance sheet and metrics and can analyze your cash-flow at anytime, anywhere.

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Short-Term Liquidity vs Long-Term Solvency

Liquidity measures your company's short-term ability to pay its bills. Solvency is the long-term measure of your ability to keep the company running and profitable over the long-term.

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The first part of the cash flow statement usually focuses on liquidity, specifically on operational cash flow (amounts expected to receive or pay out in the upcoming year.)

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Solvency is evaluated in terms of debt levels and equity, which are primarily shown in the cash flow from the financing section of the cash flow statement. It measures how your cash flow can support your long-term liabilities—your ability to serve the interest payments on loans after paying all its operational obligations, and making all necessary investments.

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In general, an ecommerce store should aim to maintain a healthy balance of both short-term and long-term liquidity. While short-term liquidity ensures that you can cover your immediate expenses, long-term liquidity allows for strategic investments that can help the business grow and remain competitive in the long run.

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Ultimately, the ideal mix of short-term and long-term liquidity will depend on your size, growth plans, and capital needs. It is important for you to regularly monitor your liquidity position and adjust your strategy accordingly to ensure continued success.

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TLDR

The cash flow statement is an important financial statement as it allows managers, banks, lenders and investors to quickly see how money is coming in and being spent by your business, indicating your ability to pay your obligations and stay liquid and solvent.

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About Finaloop

We are a technology company providing automated end-to-end accounting service to ecommerce businesses. Our system connects to your apps, syncs all your data and reconciles your books in real-time, replacing your bookkeeper, your accounting software, and your ecomm integrations. We offer reconciled books available 24/7, tax-saving insights, and a single place for all your financial data.

The information provided on this website does not, and is not intended to, constitute legal advice. All information, content, and materials available on this site are for general informational purposes only. Readers are advised to consult with their attorney or accountant with any questions or concerns.

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