What Is the Relationship Between the Balance Sheet & Cash Flow Statement?

A solid bookkeeping system is the foundation of an accurate balance sheet.
A solid bookkeeping system is the foundation of an accurate balance sheet. (Image: Jupiterimages/Photos.com/Getty Images)

A balance sheet is a snapshot of a company's overall financial situation at a particular moment in time. A cash flow statement provides an overview of a company's liquidity, or the amount of cash that it has on hand to meet day-to-day expenses. Although there is no direct correlation between the information on a cash flow statement and the information on a balance sheet, a company that successfully manages to have funds available to meet daily expenses will likely accrue a surplus down the line.

The Balance Sheet

A balance sheet is made up of two sections: assets and liabilities. The asset section is a list of everything that the business owns, including the cash in its bank account and the equity it has accrued in its business property. Other assets include accounts receivable, or money that is owed to the company. The liabilities section lists everything that the business owes, including business debt as well as accounts payable. The net worth of the business equals the sum of its liabilities subtracted from the sum of its assets.

The Cash Flow Statement

A cash flow statement is a document detailing a company's liquidity, or the amount of cash that it has available to cover its expenses. A cash flow statement demonstrates how much money a business has available, detailing the funds coming in as well as those flowing out. The available funds listed on a cash flow statement do not directly correlate with business income, or profit. Rather, businesses often have sources of funds other than business income, such as business loans.


A healthy balance sheet is usually the result of successful long-term management of a company's cash flow. A business that manages to consistently have funds on hand to meet its daily expenses is able to take advantage of opportunities that generate income, eventually having enough cash on hand to make successful investments. A business that is consistently short of cash is forced to explore expensive financing options, such as business credit cards, that interfer with its ability to accumulate the assets listed on its balance sheet.


A business can have a beneficial cash flow situation even if it is not earning a profit, such as if it consistently secures loans or liquidates investments. However, this type of strategy eventually has a negative effect on its balance sheet by increasing the amount of debt or depleting existing assets. A company can have a difficult cash flow situation even if it is earning a profit if it is saddled with past debt that it is repaying. Although these loan payments interfere with cash flow, they improve the balance sheet by reducing the amount of debt.

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