eCommerce CFO

Cash Flow Statement in eCommerce Business

We all know that profit is not the same thing as cash. Technically your business can make a profit but have no money at all. Cash is, essentially, what we are interested in, not the profit we made or our balance sheet position. Why do small eCommerce business owners, so often, not analyse nor prepare the cash flow statements whatsoever? I come across that negligence most of the time when analysing or helping an SME. Anyway, I hope you are more conscious of the importance of working with cash flow reports on a regular basis. Thus, I thought I would put some educational resources for you about what the cash flow statement is about.

The Cash flow statement or Statement of cash flows classifies cash receipts and cash payments as operating, investing and financing activities.

  1. Operating activities include the cash effects of transactions that create revenues and expenses. Thus they enter into the measurement of net income.
  2. Investing activities include (a) cash transactions that involve the purchase or disposal of investments and property, plant, and equipment, and (b) lending money and collecting the loans.
  3. Financing activities include (a) obtaining cash from issuing debt and repaying the amounts borrowed, and (b) obtaining cash from stockholders, repurchasing shares, and paying dividends.

The operating activities category is the most important. It shows the cash provided by your company’s operations. This cash source is generally considered the best measure of a company’s ability to generate sufficient cash to continue as a going concern.

So now, let’s dive into types of cash inflows and outflows.

  • Operating activities – income statement items

Cash inflows:From the sale of goods or services.From interest received and dividends received.

Cash outflows:To suppliers for inventory.To employees for wages.To government for taxes.To lenders for interest.To others for expenses.

  • Investing activities – changes in investments and long-term assets

Cash inflows:From the sale of property, plant, and equipment.From the sale of investments in debt or equity securities of other entities. From the collection of principal on loans to other entities.

Cash outflows:To purchase property, plant, and equipment.To purchase investments in debt or equity securities of other entities.To make loans to other entities.

  • Financing activities – changes in long-term liabilities and stockholders’ equity

Cash inflows:From the sale of common stock.From issuance of debt (bonds and notes).

Cash outflows:To stockholders as dividends.To redeem long-term debt or reacquire capital stock.

To make it simpler:Operating activities involve income statement items.Investing activities involve cash flows resulting from changes in investments and long-term asset items.Financing activities involve cash flows resulting from changes in long-term liability and stockholders’ equity items.

Sometimes, a business classifies as operating activities some cash flows related to investing or financing activities. For example, receipts of investment revenue (interest and dividends). But I do not want to go further into that as not really relevant at this moment.

We have to remember that not all of a company’s activities involve cash. Examples of noncash activities may be:

  1. Direct issuance of common stock to purchase assets.
  2. Conversion of bonds into common stock.
  3. Direct issuance of debt to purchase assets.
  4. Exchanges of plant assets.

Companies usually report these activities on a separate schedule at the bottom of the statement of cash flows or in a separate note or supplementary schedule to the financial statements. It depends on what financial reporting standards are in use.

I will be drilling about this topic in my other posts too, as it is the most critical and at the same time the most neglected thing in a small business world.

Marek Niedzwiedz, Your CFO

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