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Business owners: Are you classifying cash flows correctly?

Accurate financial statements are essential for understanding your business’s financial health. But as your business grows, financial transactions can become more complex, and preparing these statements properly isn’t always straightforward.

One area that often trips up business owners is the statement of cash flows. This report shows where your cash is coming from and where it’s going. Simple, right? Not always! Ensuring cash flows are classified correctly can be a challenge, especially when following U.S. Generally Accepted Accounting Principles (GAAP).

Here’s a breakdown to help you make sense of it all:

What Are the Three Types of Cash Flows?

1. Operating Activities
This section shows the cash your business generates or uses during its normal operations. Think of it as the day-to-day financial activity of running your business.

It typically starts with your net income (on an accrual basis) and adjusts for things like:

• Changes in accounts receivable, inventory, or payables
• Depreciation or amortization (noncash expenses related to equipment wear and tear)
• Gains or losses from selling assets

Why does this matter? Several years of negative operating cash flow can indicate trouble, such as difficulty staying afloat or needing a major pivot.

2. Investing Activities
If your business buys or sells property, equipment, or marketable securities, these transactions appear in the investing activities section.

This section gives insight into whether your business is:

• Reinvesting for growth (e.g., buying new equipment or expanding operations)
• Selling off assets to raise emergency funds

For example, if your business sells a piece of machinery, that cash would show up here. On the flip side, if you’re buying new tools or software to enhance productivity, it’s also recorded in this section.

3. Financing Activities
The financing activities section shows how your business raises and manages funds through loans, equity, or other sources.

It includes:

• Loan proceeds and repayments
• Dividends paid to shareholders
• Contributions or withdrawals by owners
• Stock repurchases

Sometimes transactions happen without cash changing hands. For example, if you issue stock to pay off a loan, that would be disclosed separately in your statement to give a complete picture.

Why Does This Matter?

Properly classifying cash flows helps you—and anyone reviewing your financials—see the full picture of how money moves through your business. Investors and lenders often look closely at this statement when deciding whether to fund or partner with your company.

Need a Hand?

Classifying cash flows the right way can get complicated. If you’re unsure how to organize your financial statements, we’re here to help.

We can work with you or your accounting team to review and refine your reports, so you can focus on what you do best: running your business. Let’s make sure your financial story is accurate and easy to understand!

The post Business owners: Are you classifying cash flows correctly? appeared first on Padgett Advisors.