How to Read a Cash Flow Statement Like a Founder
You’re making solid revenue. Your Profit & Loss (P&L) says you’re profitable. But your bank account tells a different story.
If you're a founder running a business that earns $500K or more, this disconnect is common. The reason? You're probably looking at your Profit & Loss and Balance Sheet, but missing the third report that explains what’s really happening with your money: the Cash Flow Statement.
Understanding how to read it is essential—not in a “what does this number mean” way, but in a way that helps you run your business better.
What a Cash Flow Statement Actually Tells You
At its core, a cash flow statement answers one key question: Where did the money actually go?
While your Profit & Loss shows income minus expenses, and your Balance Sheet shows assets, liabilities, and equity, the cash flow statement shows how money moved in and out of your business over time.
It’s usually broken into three sections:
1. Operating Activities
This includes day-to-day business activity, like:
Client payments
Payroll and contractors
Software, rent, and marketing
Owner draws (if categorized here)
This is where your core operations show up. Positive cash flow here is essential. If your business isn't generating cash through operations, it’s worth digging deeper.
2. Investing Activities
These are purchases that are long-term or strategic, such as:
Equipment or property
Inventory buildup
Product development
Annual software purchases
This section often shows negative cash flow. That’s not inherently bad—it’s about whether the investment supports your business growth.
3. Financing Activities
This section captures debt and owner funding:
Loan draws and repayments
Credit card payments
Owner contributions or distributions
Equity investment
None of this touches your Profit & Loss, but it hits your bank account immediately. It’s a major reason why profit doesn’t always match cash.
Why You Can Be Profitable and Still Low on Cash
Profit measures income minus expenses, but it doesn’t reflect real cash leaving your business.
That’s because many cash outflows aren’t counted as expenses in your Profit & Loss. Some examples:
Loan principal payments
Credit card payoffs
Owner distributions
Inventory that hasn’t been sold yet
If you're only reviewing your Profit & Loss, these don’t show up at all—but your cash balance still drops.
How to Read a Cash Flow Statement Like a Founder
Reading your cash flow report isn’t about memorizing categories. It’s about pulling the right insights so you can make better decisions.
Is your core business generating cash?
Operating cash flow should be positive more often than not. If it’s negative, ask:
Are you undercharging?
Are expenses growing faster than revenue?
Are client payment timelines stretching you thin?
Are your investments draining you or setting you up for growth?
Look at the investing section and ask:
Are large purchases aligned with strategic growth?
Are you prepaying for inventory or tools you don’t yet need?
Is this spend temporary or recurring?
It’s easy to overspend here and think the drop in cash is just part of doing business. The cash flow report shows if that’s sustainable.
Are you managing debt intentionally?
Loan and credit card payments often get overlooked because they don’t hit the Profit & Loss. But they can eat into your cash position quickly.
Look for:
Large, lump-sum credit card payments that should be scheduled more strategically
Owner distributions that go uncategorized but reduce liquidity
Debt service that’s growing faster than your profit margin
Can your business absorb a slow month?
Use the cash flow statement to estimate your runway. If revenue dipped for 30 days:
Could you still cover payroll and core expenses?
Would you need to draw on a line of credit?
Would your cash balance carry you through?
This is key for seasonal businesses or those with irregular payment cycles.
Why This Matters Even If You’re “Doing Fine”
Many founders ignore their cash flow report until something feels off. But waiting until you're in a tight spot means missing chances to optimize while things are still going well.
This isn’t about fear-based planning. It’s about clarity, knowing where your cash is going and having control over what happens next.
You don’t need to be a finance expert. You just need reports that reflect how your business actually operates and support that helps you interpret them when needed.
Know Your Numbers. Actually Understand Them.
At Harmonic Accounting, we don’t just hand you reports, we help you understand what they mean. Every client receives the three core financial reports: the Profit & Loss, the Balance Sheet, and the Cash Flow Statement.
And when questions come up, we’re here to walk through them with you. Because it’s not just about getting the report, it’s about feeling confident in how to use them.
