Where Did All My Money Go? Understanding the Statement of Cash Flows

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If you’re like most QuickBooks users, you rely on the Profit & Loss Standard report to monitor how your business is doing. However, you may have noticed Cash77 that it rarely, if ever coincides with what’s in your bank account (hint: it’s not supposed to). An overlooked, yet valuable report, is the Statement of Cash Flows. The Profit & Loss Standard (P&L), provides only partial insight into the health of your business – what you earned and spent. The Statement of Cash Flows explains your change in cash on hand.

Cash versus Accrual

Unlike some accounting packages, QuickBooks allows you to run most reports on either the cash or accrual basis. Cash-basis means that transactions don’t appear on your Profit & Loss statement until either your customer pays their invoice or you pay a vendor (or employee). So, if you enter a bill in QuickBooks to be paid later, the expense won’t immediately appear on a cash-basis P&L. Similarly, invoices that you send to customers won’t immediately appear on a cash-basis P&L. The expense appears when you write a check to the vendor, and the revenue appears when the customer pays their invoice. Accordingly, cash-basis reports don’t necessarily report a company’s true financial performance. You could have a stellar looking Profit & Loss Report, but a bunch of unpaid bills in QuickBooks. For that reason, many accountants prefer that business owners use accrual-basis reports.

Accrual-basis reports recognize the effect of every transaction on your P&L immediately. Customer invoices appear on accrual- basis P&L reports as soon as you save the transaction, as do unpaid vendor bills.

Accrual-basis reports provide a much better picture of where the business stands, but can make it harder to understand your current cash position. However, a cash-basis P&L isn’t the panacea for managing cash flow. Your business has many transactions that affect your Balance Sheet instead of the P&L, such as loan payments or owner distributions. (Remember, the Balance sheet tracks assets, liabilities, and equity.) The Statement of Cash Flows explains your change in actual cash balance based on all your cash transactions – whether they affect the Balance Sheet or P & L, making it a great addition to Balance Sheet and P & L. (Audited financial statements are required to show all 3 reports.) So let’s take a closer look.

The Statement of Cash Flows

Suppose your cash balance at the beginning of your fiscal year was $100,000, and today it is $75,000. The net income figure on your P&L won’t give you the full details on why your cash balance decreased, but the Statement of Cash Flows will. To do so, choose Reports > Company & Financial > Statement of Cash Flows.

This report automatically defaults to This Fiscal Year-To-Date, but you can choose another time period if you wish. If this is your first time, I recommend starting with 1 month, (no more than 1 quarter), until you are more comfortable with reading it.

Your Statement of Cash Flows report will include up t

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