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A period's cash movements sorted into operating, investing and financing, adding up from the opening balance to the closing one, and the operating line read against the profit.
Paper packet. Every task here also exists on screen, where it is checked automatically; answers written on paper are not assessed by Nydus. When you are back at a device, enter your answers there.
You will sort a month's movements through the account into operating, investing and financing, add them from the opening balance to the closing one, and read the operating line on its own to say whether the trading brought cash in — even when a loan or a machine makes the balance say otherwise. You will also bridge an operating profit to its operating cash flow.
The balance sheet shows the cash on one date, and the income statement shows what a month earned. The cash-flow statement explains how the cash got from the figure on one balance sheet to the figure on the next: every movement in the account over the period, sorted by why it happened. You already know every kind of movement it contains; the new skill is putting each into one of three piles and reading the piles against each other, because the story is in the sorting, not in the total.
| Term | What it means |
|---|---|
| Operating cash flow | The cash the trading brought in or used. |
| Investing cash flow | Cash spent on, or received for, things kept for years. |
| Financing cash flow | Money from or to lenders and the owner. |
| Change in cash | The three sections added together. |
| Free cash flow | Operating cash flow less the cash spent on equipment: what the business could pay out or save. |
| Minus sign | How a movement out of the account is written on the statement. |
The cash-flow statement answers where did the cash go? It takes every movement through the account in the period and puts it in one of three piles, by the reason it moved.
| Section | What goes in it |
|---|---|
| Operating | customers' payments in; suppliers, staff, rent and the other running costs out |
| Investing | equipment, vehicles, fit-outs bought; old ones sold |
| Financing | loans received and repaid; money the owner puts in or takes out |
Add the three and you have the change in cash; add that to the opening balance and you have the closing balance — the same figure the balance sheet shows on the last day.
$$\text{closing} = \text{opening} + \text{operating} + \text{investing} + \text{financing}$$
The sorting is the whole value. Two businesses whose balances both rose by 800 dollars can be in opposite positions: one traded well, the other traded at a loss and borrowed 3000 to cover it. The bank statement shows the same line for both. Only the operating section tells them apart.
Another way: steps
Another way: table
Fixit Mobile, May, in dollars. The account opens at 1200.
| Section | Movements | Total |
|---|---|---|
| Operating | 8900 in from customers, 9300 out | −400 |
| Investing | none | 0 |
| Financing | 2500 loan in, 350 repaid, 1000 drawn | 1150 |
| Change | 750 |
The account closes at 1950, up 750 — and the trading used 400 dollars. The loan is what made the month look good.
Start from the bank statement. Every line on it is a movement, and every movement goes somewhere. A card-provider payout that combines several days of takings is one operating line; a transfer from the owner's personal account is financing.
Sort by why the money moved. Because the business traded — sold, bought stock, paid wages, rent, power — it is operating. Because it bought or sold something it keeps for years, it is investing. Because a lender or the owner put money in or took it out, it is financing. The interest on a loan is usually shown with operating, as a cost of running the business; the repayment is financing.
Total each section with signs. In is positive, out is negative.
Add, then add the opening balance. The result is the closing balance.
Check the statement against the balance sheet: its closing figure must equal the cash on the last day's sheet. If it does not, a movement has been left out or counted twice. Then read it against the income statement: operating cash flow and operating profit should differ only by dates — sales not yet paid for, bills paid for an earlier month, stock bought and not yet sold. A gap that cannot be explained by dates is worth looking into.
Corner Bean's income statement for March shows an operating profit of 1800 dollars, and its operating cash flow for March is 1100. Both are right. Harbor Office was invoiced 900 dollars in March and pays in April, so that 900 is March's revenue and April's cash. Alexa also paid the roaster 200 dollars in March for beans delivered in February, which is February's cost and March's cash.
Something also moved the other way: 400 of February's catering invoices were paid in March, which is February's revenue and March's cash. So the bridge from profit to cash is 1800 − 900 − 200 + 400 = 1100.
Every gap between the two figures is a date: a sale or a cost that belongs to one month and moved money in another. That is the whole reason a business keeps both statements, and why neither can stand in for the other.
The signs of the three sections, side by side, describe the kind of month a business has had.
Operating positive, investing negative, financing negative: the trading brought in cash, which paid for new equipment, loan repayments and the owner's drawings. This is the pattern of a business paying its own way.
Operating negative, financing positive: the trading used cash, and a loan or the owner covered it. Once, in a quiet month, it may be fine. Repeated, it means the business is being kept alive by borrowing, and the loan will run out before the problem does.
Operating positive, investing strongly negative, financing positive: a business growing — borrowing to buy equipment it expects to earn from.
Operating cash flow less the cash spent on equipment is often called free cash flow: the cash the business generated that is free to repay loans, pay the owner or be saved. A business whose free cash flow is below zero year after year is spending more on itself than its trading brings in.
A few kinds of movement are easy to put in the wrong pile.
A loan payment is two movements in one. The interest is the cost of borrowing and is shown with operating; the part that reduces the debt is financing. The lender's statement gives the split.
Sales tax collected from customers and paid on to the tax authority passes through the account without being the business's money. Both the tax collected and the tax paid over are usually shown within operating, and they largely cancel — but not in the same month, which is why a quarter's tax payment can make one month's operating line look poor.
Income tax on the business's profit is paid from the business's cash and is shown with operating. Where the owner is taxed personally on the profit instead, paying it from the business account is a kind of drawing, and sits in financing. Which applies depends on the legal form and on where the business trades.
Selling old equipment brings cash into investing, not operating, even though it came from a sale. It is the reverse of buying equipment.
The owner putting money in is financing, whatever it is spent on. Counting it as operating makes the trading look stronger than it is.
In each case the test is the same question the whole statement is built on: why did this money move?
An online shop selling kitchenware doubled its sales in a year and made an operating profit of 38,000 dollars. In the same year its owner took out a 20,000 loan, and still the account was nearly empty in December. The accountant built the cash-flow statement to show why.
Operating cash flow was only 9,000. The gap from the 38,000 of profit was almost all stock: to keep up with doubled sales the shop held 31,000 more stock at the year end than at the start, all paid for. Customers pay at checkout, so there were no unpaid invoices to blame; the cash was on the warehouse shelves.
Investing was −16,000: new shelving, a packing machine and a larger warehouse fit-out. Financing was +20,000 from the loan, less 4,000 repaid and 12,000 of drawings: +4,000. The change in cash was 9,000 − 16,000 + 4,000 = −3,000, which matched the fall in the account.
Read together, the sections told the owner three things. The trading was profitable but turned little of its profit into cash, because stock grew with the sales. The equipment was paid for mostly by the loan. And free cash flow, 9,000 − 16,000 = −7,000, was below zero: the shop spent more on itself than its trading brought in. For the next year she set two rules: stock to grow no faster than sales, measured in days of stock each month, and drawings to be paid only out of free cash flow.
When a business applies for a loan, lenders read the cash-flow statement alongside the income statement, and many trust it more: profit can be shaped by when sales and costs are counted, but cash either moved or it did not. A lender wants to see operating cash flow comfortably larger than the loan's yearly repayments, because that is the only money the repayments can come from once the loan itself has been spent.
Cash flow and profit match. Profit counts sales when made and costs when incurred; operating cash flow counts them when paid. An invoice unpaid at month end is profit and not cash.
A rising balance means healthy trading. Look at the operating line; the balance may be held up by a loan.
Drawings are an operating cost. They are money to the owner, and sit in financing with the loans.
Buying a machine is an operating cost. It is investing: the cash leaves once and the machine is used for years.
A falling balance means a bad month. It may be healthy trading paying for a machine outright.
The owner's money in is trading. It is financing, whatever it pays for, and counting it as trading makes a weak month look like a strong one.
Total the operating section: customers 5,000, seed, fuel and wages 3,200.
$5000 - 3200 = 1800$
Trading first.
Write the investing section: a pump bought outright for 1,500.
$-1500$
Kept for years.
Total the financing section: loan repaid 200, drawings 700.
$-200 - 700 = -900$
To the lender and the owner.
Add the three.
$1800 - 1500 - 900 = -600$
The change in cash.
Add the opening balance of 1,100.
$1100 - 600 = 500$
A falling balance, and a good month: the trading was strong; the pump took the cash.
Add the customers' payments on the statement.
$8900$
Walk-ins and corporate clients.
Add the trading payments: parts, wages, rent, insurance.
$9300$
Every running cost paid in May.
Total the operating section.
$8900 - 9300 = -400$
The trading used cash.
Total the financing section: loan 2,500 in, 350 repaid, 1,000 drawn.
$2500 - 350 - 1000 = 1150$
The loan dominates.
Add the sections and the opening 1,200.
$-400 + 0 + 1150 = 750; \quad 1200 + 750 = 1950$
The balance rose by 750.
Read the pattern.
$\text{operating negative, financing positive}$
The loan held the month up; Dan checks why trading used cash before it happens again.
Total the quarter's operating cash flow.
$3400 + 1100 + 2800 = 7300$
January, February and March.
Total the cash spent on equipment.
$2500$
The new espresso machine in March.
Find the free cash flow.
$7300 - 2500 = 4800$
Cash the trading generated beyond what the equipment took.
Total the financing: loan repaid 1,200, drawings 4,500.
$-1200 - 4500 = -5700$
What went to the bank and to Alexa.
Compare the free cash flow with the financing.
$4800 - 5700 = -900$
The café paid out 900 more than it freed.
Find the change in cash over the quarter.
$7300 - 2500 - 5700 = -900$
The account fell by 900.
Decide what the pattern calls for.
$\text{drawings above free cash flow}$
Healthy trading; the drawings ran ahead of what it could pay, which one quarter can bear and a year could not.
Write the investing and financing totals.
$-2500; \quad -800$
Each with its sign.
Add the three sections.
$1500 - 2500 - 800 = -1800$
The change in cash.
Add the opening balance.
In November, Fixit Mobile received $10300$ dollars from customers and paid $8100$ to suppliers and staff. It spent $1800$ on equipment (a soldering station), received $0$ of new loan, repaid $350$ of loan, and the owner drew $1500$. The account opened the month at $2100$. Fill in the cash-flow statement, writing money out with a minus sign.
| Dollars | |
|---|---|
| Operating cash flow | |
| Investing cash flow | |
| Financing cash flow | |
| Change in cash | |
| Opening cash | 2100 |
| Closing cash |
Complete the worked solution: a shop opened the month with $2000$ dollars. Customers paid $9900$ and it paid $7600$ to suppliers and staff. It spent $1300$ on a new counter, repaid $200$ of its loan, and the owner drew $900$. Build the cash-flow statement.
Total the operating section.
$9900 - 7600 =$ a
Only the trading.
Write the investing section.
$-1300$
The counter is kept for years.
Total the financing section.
$-200 - 900 =$ f
The loan repaid and the drawings both go to a lender or the owner.
Add the three sections.
$(\text{operating}) - 1300 + (\text{financing}) =$ n
The change in cash for the month.
Add the change to the opening balance.
$2000 + (\text{change}) =$ c
The closing cash, which the balance sheet must agree with.
Eight movements through Corner Bean's account in one quarter. Sort each into the section of the cash-flow statement it belongs in.
| Operating | Investing | Financing | |
|---|---|---|---|
| Card takings at the counter | |||
| Paying the roaster's bills | |||
| The baristas' wages | |||
| A new espresso machine, $2381$ dollars | |||
| Selling the old grinder | |||
| A bank loan received | |||
| A repayment on the loan | |||
| Money Alexa took out for herself |
Tomasz is building Long Row Gardens' cash-flow statement for June from the bank statement. The account opened the month at $2000$ dollars. Put his steps in order.
Number the steps in order (write the number in the box):
A catering business made an operating profit of $1600$ dollars in May. That includes a $300$-dollar job invoiced in May that the customer will pay in June. In May it also paid a $300$-dollar supplier bill for April's ingredients. Nothing else differs between its profit and its trading cash. What was its operating cash flow for May, in dollars?
Answer:
A dental laboratory's bank balance rose by $500$ dollars in October. During the month it received a $4600$-dollar bank loan, bought a milling machine for $1900$ dollars in cash, and its owner drew $900$ dollars. Nothing else moved except its trading. What was its operating cash flow for October, in dollars?
Answer:
A small gym's quarter, in dollars: it opened with $5000$. Members paid $46600$ and it paid $34200$ in wages, rent and running costs. It bought new rowing machines for $6200$, took a loan of $9200$, repaid $1300$ of an older loan, and the owners drew $2700$. Fill in the statement.
| Amount | |
|---|---|
| Operating cash flow, dollars | |
| Investing cash flow | |
| Financing cash flow | |
| Change in cash | |
| Closing cash |
Lesson test: one question per skill, one attempt each, no hints. Your answers are checked when you submit.
In March, Corner Bean received $11500$ dollars from customers, paid $9700$ to suppliers and staff, spent $2500$ on equipment, received $0$ of loan, repaid $400$ and paid the owner $1500$ in drawings. What was its operating cash flow, in dollars? Write cash used with a minus sign.
Answer:
You can build a cash-flow statement, read its operating line and bridge it to the profit. Tell someone how a business's balance can rise in a month when its trading used cash. Next: choosing the statement that answers a given question.
15. Your turn: open at 2000; operating +1500; a 2500 machine bought; 800 drawn, step 3
$2000 - 1800 = 200$
The closing cash.