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Understanding Cash Flow

Understanding Cash Flow
Cash Flow Statement Holds Key to How Your Business is Doing

One of the questions I get the most as an accountant is, “If my Profit and Loss Report shows I have $5,000 in net income, why don’t I have that in my bank account?”  The answer is a simple one.  Your Profit and Loss Report only shows you your income and expenses for the period of time you are looking at.  As a restaurant owner, you are more than likely paying for items that are on your balance sheet, such as; equipment leases, sales tax payables, SBA loans, credit cards and many other items that affect your cash but not your profits.

In order to really get a handle on how your business is doing, you need to look at your Cash Flow Statement.  This statement reconciles the difference between what your Profit and Loss Report shows and what your bank register shows at the end of a given period of time.  Here is an example of a Cash Flow Statement:


The Cash Flow Statement shows the net income number at the top and then purchases and expenditures are added and subtracted to come up with the amount of cash that was provided by the operating activities of the restaurant.  The same is done for the financing activities of the business.  For simplicity sake, I will not go into how these numbers are calculated.  I will say that the most important section of this statement is at the bottom.  The “cash at beginning of period” will match the total of all of your cash accounts on the beginning date of this report.  This is true with the “cash at end of period” as well.  The key number is the “net cash increase (or decrease) for period.  This number tells you whether your cash is growing or shrinking.  If you watch this number consistently, you will be able to see how your business is progressing.  If the number is shrinking, then you can look at the other numbers in the report to see why.  Likewise, if the number is growing, you can examine the above numbers to see if the cash increase is from the operating activities (that’s where you’d like it to be coming from) or whether it is because you have added cash from your financing (you had to put personal money in to help the business continue).  If you only had time to examine one of your financial reports, I’d start with this one.  The other reports provide the detail for any questions you may have about this report.

For more information, please contact TM Accounting Services, phone (866)966-0855 (toll free), fax (877)482-9538 and the website is