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What is the difference between a cash flow statement and a balance sheet?

Cash Flow Statement vs Balance Sheet – What’s The Main Difference?

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Small business owners are sometimes not as in tune with all the financial activities within their business as they could be. If that sounds like you, one of the first things to know, hands down, are the differences between a cash flow statement vs balance sheet.

These are two of the major company financial statements a small business will issue to show its profitability. They reveal the overall business activities and the bottom line financial health of their company. 

While these two reports connect in some ways, there are differences between the two that are very important to understand. Let's dive deeper into both to gain a better understanding. 

What is a Balance Sheet?

A balance sheet is a listing of a company's assets, liabilities, and shareholders' equity. It covers a specific period of time. 

In simpler terms, the balance sheet will show:

  • What your company owns (your current assets)
  • What your company owes (your current liabilities) 
  • Any money invested by stockholders

The balance sheet will show not just your short-term and long-term assets but the direct method by which you obtained those assets. Your company could do this by issuing equity or financing debt, for example.

There is a simple equation you can do to figure out your company's assets:

Assets = Liabilities + Owners' Equity

Your balance sheet is calculated by taking all your assets and adding them to all your liabilities as well as your total shareholders’ equity. According to basic accounting principles, your accounts payable and accounts receivable must always be "in balance" if you want a healthy company. 

Your company does this by having each transaction reflect in two ways. For example, if you pay down your debt, the company's cash balance is reduced by that amount and you reduce your overall debt liability as well. This is how you make sure your company's balance sheet is always equal on both sides.

This is done over a certain period of time. For example, you can have a balance sheet that shows just one month's worth of financial activities, a year, or multiple years.

What is a Cash flow statement?

A cash flow statement is slightly different from a balance sheet. It is concerned only with the amount of cash as well as cash equivalents that come into your company and go out of your company. 

This financial report will show you how well you are managing the cash you generate to pay all of your operating expenses as well as obligations. You will get your cash flow statement from your income statement

Your income statement shows the revenues and expenses of your company over a certain period of time. It is also sometimes called the profit and loss statement. To calculate your cash flow statement, you'll take your net income and then add or subtract cash that comes in (or goes out) from three main activities: financing, investing and operating. Each section of the cash flow statement will include different items: 

  1. Financing activities include any cash that you receive from financial institutions such as banks or investors. Outgoing financing activities will include any cash you pay to shareholders in the form of dividends, for example. 
  2. Investing activities cover loans you make to your vendors or receive from customers, any sale or purchase of an asset, and any merger/acquisition credits or payments you make to cash.
  3. Operating activities will include any cash that you generate from the sale of your services and/or products. On the outgoing side, it will include wages and salaries, payments you make to vendors/suppliers, and interest payments, for example.

To sum a cash flow statement up, it is a financial report that will allow your investors to see how your company is operating. The report shows where the money is coming into the business as well as where it is being spent. 

Investors will use the cash flow statement to determine whether they believe your company is solid from a financial perspective. Credits will use this statement to determine if they believe you will be able to satisfy your debts and pay your operating expenses.

In its basic form, the cash flow statement will show someone the company's ability to pay their bills - or their liabilities. This is used to determine whether a bank offers you a loan or an investor injects money into the business.

Cash flow statement vs balance sheet: The Key Differences

While both the cash flow statement and balance sheet are related to each other in some ways, there are key differences between the two. Making a comparison between a cash flow statement vs. balance sheet really comes down to a few basic categories such as timing, performance, and reporting. 

Here are some of the main differences between the two.

1. Timing 

Generally speaking, a cash flow statement will report the cash basis of your company over a shorter period of time. This report is run often throughout the year, and at least once a quarter, to show the net cash into and out of the business, as well as the current working capital.

A balance sheet, by contrast, will generally reflect a longer period of time. It is usually only reviewed twice a year, at most. When reviewed, it will typically cover the last 12 months of activity.

Because of these timing differences, investors will look at different reports. Investors who are in it for the long haul will be more concerned with profits and/or losses over multiple years. They're more concerned with overall liquidity than current cash. They will, therefore, use your balance sheet as a guide.

Short-term investors typically look at your cash flow statement. That's because they are more interested in selling and buying frequently. They get their best returns when they can invest in companies that generate positive cash flow.

2. Reporting

Not only is the timing of the reporting different, but the terms are as well. The balance sheet uses the label "assets" for all income. All expenses are labeled as liabilities on this report. On a cash flow statement, it's referred to as cash inflow and cash outflow.

3. Performance

This is perhaps the biggest difference between the two reports - what they show and how they're used. 

A cash flow statement will take into consideration money from your day-to-day financial activities (listed above). Again, this includes anything from operations and investments as well.

A balance sheet, on the other hand, will show the money that will result from the assets and liabilities over a longer period of time. In this report, you'll be able to see your net profit and your gross profit. It won't show what your current cash position is, though. 

Do They Have Anything in Common?

These financial statements are all dependent upon each other.

The income statement doesn't reflect cash. Accruals, revenue, depreciation expenses, amortization, and other payables will be reflected here but not on the others. The net income that's reported on this statement will then link to both the balance sheet and the cash flow statement. It reflects in the retained earnings for the balance sheet. It's also where the operations section of the cash flow statement begins. 

The main things that the two financial reports have in common come from the financing and investing sections (on the cash flow statement) and the liabilities and assets sections (on the balance sheet).

These two reports label the activities differently, but they represent very similar business activities. Remember that when cash flows in and out of the business, it will be reported on the cash flow statement. It'll also be reflected, though, as either a liability or asset. 

Cash flow statement vs balance sheet FAQ:

Q: What is an inflow in Cash?

A: This is money that goes into your business. It can come from a number of sources, including investments, financing, or sales your company generates. In other words, it's any money that you receive.

Q: What are Cash Outflow examples?

A: This is the direct opposite of cash inflow - it's any money that exits the business. There are a number of sources of cash outflow. Some include salaries, bonuses, and wagers that you pay employees; purchases you make to run the business; investments you make; and dividends you pay to shareholders.

Q: What are the three types of Cash Flows?

A: The three types of cash flows include financing, investing, and operating. Financing is cash you receive from banks/investors and dividends. Investing is any loans you receive or payments you make. Operating is cash from sales and wages, salaries, and payments.

Q: What is Cash Loss in the Balance Sheet?

A: Cash loss is a calculation you can do on your balance sheet to help assess the ability of your company to meet its debt service. To calculate it, you will subtract bad debts, provisions, depreciation, deferred taxes, and any other non-cash items from your net loss.

Q: What increases Cash Flow?

A: Any time your company receives money, it will increase your cash flow. The most common way this happens is when your business makes a sale of its products and/or services. You can also increase cash flow by bringing money into the business in the form of loans or investments. It doesn't matter what the source of this money is - just that it is actually coming into the business, rather than going out.

Q: Does Cash Flow include the owner's salary?

A: Because cash flow includes all salaries and wages that the company pays, the owner's salary will be included in this report. If any owner or investor takes a regular salary, then it will be included in the company's cash flow statement.

All Businesses Will Experience Cash Flow Problems From Time to Time

Managing the inflow and outflow of cash of a business is one of the most difficult challenges a business owner faces. Since there are so many variables to track (payroll costs, operating expenses, fixed asset purchases), a lot of business owners are not tracking this properly and it can cause major problems for them.

At Punch, we make sure you are regularly receiving cash flow statements and reviewing them with an experienced CFO. We analyze your cash inflows and outflows to provide you with your financial position timely. Our goal is to help you understand how your money is being utilized and how efficiently.

Let’s connect to give you a customized quote and free consultation. You have nothing to lose but so much to gain.

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