The Cash Flow Statement is made up of three sections. The first section is operating activities. Operating activities include your company's profit or loss and non-cash items that affect your profit without affecting cash. Examples of these types of non-cash expenses are depreciation and bad-debt expense. Also included in this section are changes to your operating assets and liabilities. Operating assets and liabilities include accounts receivable, prepaid expenses, accounts payable and accrued liabilities. A common feature of operating assets and liabilities is these items have been reflected in the Profit & Loss Statement in a period different from the period in which they were paid.

The second section of the Cash Flow Statement is investing activities. Investing activities are items such as property and equipment or loans receivables. An interesting aspect of investing activities assets is that they, unlike operating assets, generally do not affect the company's profit. In other words, investing assets do not represent revenue or expense items.

The third and final section of the Cash Flow Statement is financing activities. Financing activities are debt and equity items. If you increase or decrease your debt, that change is included in financing activities. Equity changes such a capital contributions or shareholder distributions also are reflected under financing activities. Like investing activities assets, financing activities liabilities and equity do not represent revenue or expense items.

The sum of the three sections: Operating activities, investing activities and financing activities is your cash flow for the period being reported. A positive number indicates an increase in cash and decrease indicates a decrease in cash. Now it's time to take a closer look at the Cash Flow Statement and see why your cash flow is different from your profit.

Compare your cash flow to your profit. If your cash flow is higher than your profit, you are either liquidating assets or increasing your debt, which is negative for your business. On the other hand, it could be that you are increasing your capital, which is a positive for your business.

If your cash flow is less than your profit, you are increasing your assets, such as purchasing property and equipment for future growth or paying down your debt. These are both positives for your business. But it could mean that your money is being tied up in accounts receivable because collections have deteriorated and your business is weakening. Or it could be that you are decreasing your capital, which is a negative for your business.

Cash flow is an indicator of where you are spending your money and the future strength of your business. Small business owners generally do not realize the importance of comparing their past years Cash Flow Statements to measure their business growth. Some of them are ignorant of the basic rules that one should follow to compare their past Cash Flow Statement with the current one. So now that you are aware of these formulas take a few minutes and review your Cash Flow Statement. Compare it with last year and see how your business is progressing. You will be surprised at how much valuable information is contained in your Cash Flow Statement.