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Keeping an eye on the money flowing in versus the cash flowing out, that’s the hub of small business financials. And the document that gets that done is called a cash flow statement.

This statement helps small businesses see where cash flows in from and how it gets spent. They’re an important way to manage finances.

What Exactly is a Cash Flow Statement?

These cash flow statements are a big part of financial accounting. They are also called statements of cash flows.

Wondering what is cash flow? These financial statements break down into financing, investing, and operating activities. They include a company’s net income, and there’s a method to calculate how much cash is available.

Wondering what is a P&L statement and how these fit in? These provide further insights into the cash flow. Read on to find out what goes into one, how to calculate cash flow and other important aspects.

what is a cash flow statement

Positive Cash Flow Vs. Negative Cash Flow

The best way to avoid a cash flow problem is to understand the differences between the types. And how each affects a company’s financial health.

  • A negative cash flow describes a situation where a small business spends more than it brings in.
  • A positive cash flow is the opposite. More money is coming in than going out.

Businesses that experience negative cash flow might be waiting on payments. Offering early payment discounts can foster a positive cash flow.

what is a cash flow statement

Purpose of a Cash Flow Statement for Small Businesses

A cash flow statement, integral to the financial fabric of small businesses, provides insights into the movement of cash and cash equivalents. This financial document works in conjunction with other important statements, such as the balance sheet and the income statement.

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The former illuminates what a business owns and owes at any given point, while the latter accentuates the revenues and expenses over a specific period.

Together, these financial statements furnish stakeholders with a holistic understanding of a business’s fiscal health. Here’s a deeper exploration of the main purposes served by the cash flow statement:

Planning Repayment of Loans

  • Financial Commitments: A cash flow statement gives clarity on available funds, aiding in the formulation of repayment strategies without hampering operational needs.
  • Capital Expenditure Decisions: By evaluating the cash inflows and outflows, businesses can prudently plan for capital expenditures, ensuring the sustenance and growth of the business.

Gaining Insights Into Spending

  • Operational Transparency: While the profit and loss statement captures revenue and expenses, the cash flow statement provides a granular view of actual cash-based transactions, revealing the real-time cash status.
  • Fiscal Precision: This statement can spotlight areas of high spending, assisting businesses in refining their expense strategies.

To Get A Better Picture of Your Cash Balance

  • Real-time Snapshot: Calculating the cash flow delivers an accurate representation of liquidity, allowing businesses to discern if they maintain sufficient funds to meet their obligations.
  • Transparency: An understanding of gross cash receipts, inclusive of underlying costs and expenses, ensures there are no misconceptions about the available cash.

Managing A Crisis

  • Predictive Analysis: Regular reviews of the cash flow statement can anticipate potential liquidity problems, empowering businesses with the foresight to address them in advance.
  • Strategic Planning: If the statement indicates a potential shortfall, businesses can preemptively address the discrepancy, for example, by revisiting terms with suppliers or exploring financing options.

what is a cash flow statement

Main Components of a Cash Flow Statement

For small businesses and large corporations alike, a cash flow statement serves as an essential financial document, detailing the movement of cash and its equivalents in and out of the enterprise.

By dividing the cash flow into distinct sections, the statement provides a comprehensive view of the company’s financial health. Here’s an in-depth breakdown of the major components:

1. Operating Activities

The operating activities are often the primary focus of a cash flow statement as they reflect the cash transactions stemming from the core business operations.

This encompasses cash generated from sales, expenses related to business operations, and adjustments for non-cash items such as depreciation. Additionally, it considers changes in working capital accounts like accounts receivable and accounts payable.

Overall, this section provides insights into how the company generates cash through its main business activities.

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2. Investing Activities

Detailing the company’s investment activities, this section includes transactions related to fixed assets such as land and buildings, vehicles, and other long-term investments.

By examining the investing activities, one can understand the cash flow associated with the company’s capital expenditures, such as the purchase or sale of equipment and property.

3. Financing Activities

Financing activities offer a view into the company’s financial decisions involving external entities. This section reports all the cash transactions with lenders and borrowers, such as issuing or repaying debt and equity.

It provides clarity on how the company funds its operations and returns value to its shareholders.

4. Net Income Figure

Every cash flow statement starts with the net income, which reflects the net cash the company has earned. It serves as a benchmark, gauging the company’s ability to generate cash efficiently.

5. Operating Expenses

These are the routine expenses a company incurs during its normal business operations. Such expenses include cash paid out as wages or salaries to employees, legal fees, accounting services, office supplies, and utilities.

All these are crucial for the day-to-day functioning of the company and provide insights into its operational efficiency.

6. Non-Operating Expenses

Appearing towards the bottom of an income statement, non-operating expenses encompass costs that aren’t directly tied to the daily operations of the company.

Items such as interest paid on bank charges and the effects of amortization and depreciation fall under this category. They provide context on the company’s financial obligations and asset utilization outside its main business activities.

Cash Flow Statement Example

It’s easier to understand a cash flow statement with an example.

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QuickBooks supplied this template. Note that some noncash revenue like appreciation needs to be included.

How to Prepare a Statement of Cash Flows

Trying to predict future cash flows hinges on a detailed statement. Here are some steps you can take to that end.

Remember to follow the generally accepted accounting principles (GAAP). Numbers need to be accurate and include operating income for income taxes.

  • Gather The Information and Data – put together contracts files and documents to arrive at a net cash flow.
  • Find A Starting Balance – should include the balance of cash equivalents and cash disbursements.
  • Calculate The First Cash Flow – this number comes from operating activities.
  • Do The Same For Investing Activities – the focus is on the buying and selling of equipment, facilities, and property.
  • Calculate Cash Flow For Financing Activities – notes payable are included. Like paying back debts to creditors and investors. Financing cash flow numbers should reflect each fiscal period.
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what is a cash flow statement

Analyzing a Cash Flow Statement

A good financial statement analysis will cover sales transactions that are not cash too. It can help put the pieces together when you’re looking for more cash.

Comparison of Direct Method and Indirect Method for Cash Flow Calculation

To understand and evaluate a cash flow statement effectively, it’s essential to know the two primary methods used to calculate cash flows: the Direct Method and the Indirect Method. Each has its own advantages and approach. Here’s a quick comparison to help you distinguish between them:

Criteria Direct Method Indirect Method
Starting Point Actual cash receipts and payments Begins with net income
Ease of Calculation Straightforward subtraction Requires adjustments for non-cash transactions
Detail Level Detailed view of cash transactions Provides a summary, focusing on adjustments
Common Usage Less common in practice More widely used due to available information from other reports
Main Advantage Clear view of cash sources and uses Takes into account non-cash transactions

Use the Direct Method

The direct method provides a straightforward way to gauge cash flow by looking at actual cash transactions. By subtracting cash outflows from inflows, you can ascertain the net cash movement. For instance, consider actual payments made to suppliers or wages paid to employees.

Use the Indirect Method

The indirect method is more intricate. It begins with the net income and subsequently adjusts for noncash transactions. Items such as depreciation, amortization, and losses or gains from the sale of fixed assets are taken into account.

It essentially provides a reconciliation between net income and net cash provided by operational activities.

Look To Operating Cash Flow/Net Sales

This specific ratio can offer valuable insights into the company’s efficiency. By examining how much cash is generated for every sale, you can determine the liquidity and short-term financial capability. Expressed in dollar terms, it indicates the cash conversion efficiency of your sales.

Calculate Free Cash Flow

Free cash flow is a critical metric that indicates the financial strength of a business. It showcases a company’s ability to produce cash after accounting for maintenance or expansion of its asset base.

You can determine free cash flow by taking the operating cash flows from the cash flow statement and subtracting capital expenditures.

Analyze Unlevered Free Cash Flow

Unlevered Free Cash Flow gives a purer view of a company’s cash-generating capability, as it looks at the cash flows before considering interest payments or other financial costs.

It provides a clearer picture of the available cash flow without the influence of the company’s debt structure. By analyzing this, you can discern the inherent cash-generating potential of the business operations.  Here’s the formula.

In conclusion, these various methods and metrics offer unique lenses through which you can view a company’s cash flow. By employing them, businesses can make well-informed decisions and strategize for sustainable growth.

Image: Depositphotos


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