Understanding your cash flow chart is simpler than it seems, and we’ll walk you through it in this guide.
In the chart below, you’ll notice three key components:
Red Bars – Represent cash leaving your business’s bank account (expenses).
Green Bars – Show cash coming into your business’s bank account (income).
Yellow Line – Indicates your ending bank account balance.
Pay special attention to the yellow line. This line must always stay above zero to keep your business solvent. If it dips below zero, it means your business has run out of cash and may struggle to cover expenses.
Example Scenario:
In the example below, notice that the yellow line dips just below zero in the third month. This indicates that by month three, this business would have exhausted its funds and would need additional resources to continue operations.
New businesses commonly see the yellow line curve downward as they invest heavily to grow. However, a successful business will see this line start to rise as income overtakes expenses, reflecting a positive cash flow.
Key Takeaway:
Always ensure your yellow line (ending balance) stays above zero to prevent financial risk and keep your business running smoothly.
If you’d like to learn more about reading your cash flow statement, check out our guide on How to Read Your Cash Flow Statement.