Business Financial Statements Part 2: Cash Flow

In Business Financial Statements Part 1: Income Statements, we shared how business financial statements are like a ship’s log—a running record of where you’ve hit rough waters and sailed through calm seas. These financial statements include income statements, balance sheets, and cash flow statements. Together, they give lenders the full picture of your business’s financial health and projected performance. 

The cash flow statement, which we cover here, earned a spot on our list of critical financial documents because it shows exactly how money flows in and out of your business. It helps you better understand your business finances and plan for the future. It also helps lenders see your ability to manage cash and how loan payments will fit in.

Let’s dive into what a cash flow statement is, why it matters, and how to get yours ready before you apply for an SBA loan. 

Meet your cash flow statement

A cash flow statement tracks the movement of money in and out of your business over a specific period of time. The basic formula for calculating cash flow is: Cash at the start of the period + cash coming in - cash going out = cash at the end of the period.

While your income statement shows whether or not the business is profitable overall and includes non-cash items, like depreciation and amortization, the cash flow statement shows whether you actually have money on hand to pay bills, make payroll, and cover expenses.

Here's an example of how a cash flow statement actually works: You make a $5,000 sale in January, but the invoice isn't due until mid-February. The $5,000 will show up as revenue on your January income statement, but that money won't appear on your cash flow statement until it actually hits your account. In the meantime, rent and payroll are due, so while you have revenue coming in, the cash won’t be there in time to cover the month’s expenses.

In this scenario, your cash flow statement will confirm that you need enough cash on hand at the start of February to cover rent and payroll rather than counting on an invoice that won’t clear until later in the month. 

The three engines behind your cash flow

Every cash flow statement runs on three engines, and each one reveals something different about how your business operates. Together, they show whether your business generates its own cash, invests in its future, or leans on outside funding to keep things moving.

• Operating activities: Cash generated or spent through your day-to-day business operations, including payroll, inventory purchases, utilities, and similar expenses. It shows if your business produces cash on its own rather than relying on loans from banks or additional funds from the owner.
• Investing activities: Cash spent on or received from long-term assets, like equipment or property. Negative numbers here aren’t automatically a red flag because they can signal that you’re investing in business growth. Investments that are losing money, however, may need a closer look.
• Financing activities: Cash received from or paid to lenders and owners. This shows how your business is funded and how it manages debt obligations over time.

Why lenders care about your cash flow statement

Here’s the big question: if your business is profitable, why do lenders care about cash flow?

Even if your income statement looks great and the profit is rolling in, lenders will look at your cash flow statement to see if your business can cover its existing loans before taking on new debt. For newer businesses without a long history of income statements, the cash flow statement gives lenders an idea of how cash is being managed and how it fluctuates on a month-to-month basis.

Cash flow statements also reveal seasonal patterns and timing gaps that an income statement won’t show. When lenders are able to see the entire picture of how cash flows in and out of your business, it helps determine how a loan and the corresponding payments will fit in. 

Getting your cash flow statement loan-ready

You should prepare your cash flow statement long before you actually need a loan. It takes time to see patterns emerge, so the earlier you start tracking your cash flow, the better. Follow these steps to get your cash flow statement ready for your loan application.

Set up accounting software—and don’t go it alone

Accounting software generates cash flow statements automatically. If your records are disorganized or this feels daunting, a bookkeeper or accountant can set the software up for you. 

Make reconciling a habit

Reconciling your accounts regularly keeps everything on track, so you can see patterns as you move through the year and start to spot gaps before they become problems.

Keep personal and business spending in their own lanes

Keep your personal and business accounts completely separate, and make sure all business spending runs through the appropriate account. It’s difficult for lenders to assess your business accurately when finances are mixed together.

Have a few years of history on hand

Lenders will need to see two to three years of cash flow statements, plus a year-to-date statement for the current year. Starting early means you’ll have that history ready when it’s time to apply.

Loop in your lender

Checking in with your lender helps catch anything that needs adjustment early rather than have it slow it down the approval process later. We’re happy to review your cash flow statement before you formally apply.

Be prepared to explain patterns and fluctuations

If your cash flow statement reveals unusual patterns or significant fluctuations, be prepared to explain them to your lender. Your ability to identify and explain the patterns gives lenders more context and allows them to see where financing will fit into the larger picture.

Chart your course to approval with accurate cash flow statements

When used correctly, a cash flow statement reveals patterns, shows whether you can cover debt payments, and gives lenders a clear view of your business’s financial reality. 

If you’re getting ready to apply for a loan, we’re happy to take a look at your cash flow statements and let you know if you’re on course or need an adjustment. Get in touch with us, and we’ll sit down with you to discuss your business before you submit your application.