Cash Flow, Line by Line

The Cash Flow Statement has one purpose: to translate Net Income at the top, straight from the P&L, into actual cash at the bottom. It has three sections:

• Operating Activities: the things your business does in the normal course of running.
• Investing Activities: things your company invests in, like equipment. This is not money from investors; that's Financing.
• Financing Activities: money the company receives or pays out for loans and investment.

One convention to know: an amount in parentheses, like ($5,000), is cash going out. Here is the sample company's month:

Operating Activities

Net Income. Straight from the P&L. The Bottom Line of the P&L is the top line of Cash Flow.

Depreciation and Amortization. This one can be a little confusing. Expensive assets are Depreciated or Amortized so only a slice appears on each P&L. But the money was already spent, all at once, and Cash Flow records that in Investing Activities. If the P&L's slices then reduced cash again through Net Income, we'd be counting the same money twice. So Cash Flow adds Depreciation and Amortization back: nobody was actually paid those amounts. This is another reason Profit isn't Cash.

Receivables. Often you don't collect right away when you sell. The most common terms are "Net 30": the customer has 30 days to pay. That's an Account Receivable (AR). Think of Receivables as zero-interest loans to your customers. A sale you haven't collected is in Revenue but not in your bank, so an increase in Receivables is subtracted from cash and shown in parentheses. This is the change in AR from the last period, not the total; the total is on the Balance Sheet.

Accrued Interest. If you have a Convertible Note, this is the interest that builds up but isn't paid before the note converts into equity.

Payables. The opposite of Receivables. When your company buys something and doesn't pay right away, that's an Account Payable (AP). It's already an expense, but the money hasn't left your account, so an increase in Payables is added back to cash. Again, this is the change from last period.

Inventory. Materials and products you buy to sell. Buying Inventory costs cash, so purchases show in parentheses. When you sell it, it becomes COGS on the P&L, and as Inventory on the Balance Sheet goes down, the line turns positive. EZ Numbers does this calculation for you.

Deferred Revenue. With annual subscriptions, you receive cash for months you haven't earned yet. That money is in your bank but not yet in Revenue, so it's added on Cash Flow.

Investing Activities

Fixed Assets. Another name for Tangible Assets: equipment, furniture, computers. When you buy them, the full amount shows as cash going out, in parentheses.

Intangible Assets. Same convention: patents, trademarks, licenses. We don't record what a patent might be worth, only what we spent to get it, such as legal and filing fees.

Financing Activities

Equity, Preferred and Common. Investors usually receive Preferred; founders usually hold Common. EZ Numbers also offers SAFEs (Simple Agreements for Future Equity), shown under Preferred. They're one of the most common and easiest ways to raise your first money.

Increase / (Decrease) in Debt. Short-Term Debt is loans of less than 12 months; longer is Long-Term. A loan you receive shows as a positive amount. When you pay it back, the principal shows as a negative amount here, and the interest goes on the P&L. For Long-Term loans, the principal you'll pay over the next 12 months is shown on the Balance Sheet as Current Portion of Long-Term Debt.

The Bottom of Cash Flow

Net Change in Cash. Operating plus Investing plus Financing. Beginning of Period is the cash you had at the start. End of Period is your actual cash at the end. We made it! The translation from profit to cash is complete.