How to read a cash flow statement

business.gov.au says a cash flow statement tracks all the money flowing in and out of your business, and its guide to reviewing your finances describes it as tracking how much cash you generated over a period. It deals only in cash: money received and money paid, in the period it actually moves.

Some cash flow statements record what has already happened. Others hold estimates for the months ahead and are really forecasts. business.gov.au says estimated figures should be clearly labelled and explained, so before you read a statement, check which kind you are looking at.

business.gov.au's cash flow statement template sets out each month in the same order:

1. Opening balance: the cash the business started the month with. In the first month it is the opening bank balance; after that it is the previous month's closing balance.
2. Cash incoming: each source of money coming in, such as sales, receipts from debtors and grants.
3. Total incoming: all the cash incoming lines added together.
4. Cash outgoing: each payment the business makes, such as purchases, rent and rates, utilities, and advertising and marketing.
5. Total outgoing: all the cash outgoing lines added together.
6. Monthly cash balance: total incoming minus total outgoing. It shows whether more came in than went out that month.
7. Closing balance: the opening balance plus total incoming, minus total outgoing. It is the cash left at the end of the month, and it carries forward as the next month's opening balance.

Work through the statement in this order:

1. Check that each month's opening balance equals the closing balance of the month before. If it doesn't, something has been entered wrongly.
2. Look at the closing balance for each month. Is it ever close to zero, or below it? That is the month a bill could go unpaid.
3. Look at the monthly cash balance. A negative month is not unusual on its own, but a run of them means the business is living off cash it built up earlier.
4. Compare the incoming lines across months. business.gov.au says the statement helps you find payment cycles and seasonal trends, such as a quiet month each year or customers who tend to pay at the same time.
5. Check the receipts from debtors, the customers you invoiced earlier. That money arrives when they pay, not when you made the sale, so a slow payer shows up here.
6. Scan the outgoing lines for irregular payments, such as a yearly renewal, that make one month look very different from the rest.

A cash flow statement and a profit and loss statement can point in different directions for the same month. business.gov.au says the profit and loss statement shows financial performance and profitability over time, while the cash flow statement tracks the cash the business generated.

The gap comes from timing and from the type of payment. In books kept on an accrual basis, a sale on credit is recorded as income at the time of the sale, but it reaches the cash flow statement only when the customer's money arrives. Some payments, such as a large purchase or a loan repayment, can affect cash and profit by different amounts or in different periods. Your accountant can explain how these are treated in your accounts.

business.gov.au suggests updating your cash flow statement regularly to spot seasonal trends and cycles, so you can prepare for busy times, plan for quiet periods and keep your cash flow steady. Reading it each month, once the bank accounts are reconciled, means you are working from figures you can trust.

Its list of things to look for when you review your finances includes periods of high or low cash flow. When a shortfall shows up, business.gov.au's guide to managing cash flow suggests options such as reducing costs, following up overdue invoices or revising your budget.