Does Your Business Need a Cash Flow Statement?

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Cash flow is one of the primary concerns in your business, so cash flow statements are the first financial statements you will create. This overview will help you build the financial tracking and reporting you’ll need to build cash flow statements and understand what’s coming in and what’s going out.

What is a cash flow statement?

A cash flow statement, also called a cash flow statement, is a financial document that shows how money flows in and out of your business. Routine financing activities, such as obtaining loans or seeking investment capital, may require these and other types of financial statements.

Cash flow statements are used to assess the financial health of a business and to provide a picture of how you spend and invest money.

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What is included in a statement of cash flows?

To understand the cash and cash equivalents flowing through your business, you will need to prepare a cash flow statement, which is generally divided into three sections. These are the most common terms, but there can be variations by industry and region. These are the three sections that are usually included:

Operating cash flow

Often referred to as “cash from operating activities”, this is usually the former. It covers cash inflows from sales or contracts and disbursements of operational expenses, such as taxes, personnel or manufacturing costs.

Cash flow from investment

The investment section records capital expenditures, acquisitions and divestitures. Both expenses and acquisitions are cash outflows, while divestments are cash inflows. It is not unusual for this section to consist mostly of cash outflows, as many successful businesses spend more money on investing than they take out.

Cash flow from financing

In this section, you will detail how your business is funded and distributes its funds. The data in this part may include transactions regarding the company’s debt and equity. If your company pays dividends to shareholders, you will enter it here.

How to calculate cash flow

To calculate your business’s cash flow, you add or subtract differences in your net income based on information on your balance sheet and income statement. Adjustments are made to income, expenses and credit transactions because net income includes non-cash items. Here are the methods used to calculate cash flow:

  • Direct cash flow method: Using the starting and ending balances of your accounts, calculate all cash payments and receipts. This includes cash payments made to vendors, cash received from customers, and any cash salary payments.
  • Indirect cash flow method: This method of calculating cash flow begins with the net income in your income statement. It only records the income that has been earned. Then you adjust any earnings before interest and taxes for transactions that affect your net income. You then add transactions that have no impact on your business’s cash flow, such as depreciation.

Accounts receivable

Cash flow statements should always include changes in accounts receivable during each accounting period. A decrease in accounts receivable indicates an increase in cash flow from customers who have settled their accounts. This translates into an increase in net profit. However, an increase in accounts receivable should be deducted from net income as it is not an increase in cash.

Inventory value

An increase in inventory should be reflected as a deduction from net income because it shows how much money your business has spent (if it was paid in cash). Inventory purchased on credit would be reflected on your balance sheet as an increase in accounts payable, with the increased amount being added to net income each year.

Example of a cash flow statement

Here is an example of a cash flow statement.

Why is cash flow important?

Insufficient cash flow can prevent your business from growing. In previous surveys, we’ve found that cash flow isn’t just the most important facet of your business, but it’s also important to investors and outside lenders. In fact, many common fundraising activities require you to provide financial statements, including cash flow.

While the financial health of your business shouldn’t be judged on just one aspect, cash flow is a valuable source that can prove that you are operating efficiently, paying bills, and growing. These statements are widely considered to be one of the most important financial statements in your business. Plus, tracking cash flow can help you make more accurate future projections.

What is cash?

As with anything related to financial math, understanding the lingo is half the battle. You may come across terms such as “negative cash flow” and “cash flow from operations”. Here’s what these and other important phrases mean.

Cash flow

Cash flow is the money that flows in and out of your business over a period of time, often reported quarterly. It is more informative than profit alone because it gives a more complete financial picture of your expenses, debts and assets.

Not all assets are cash flow. Only short-term investments – usually bonds with a maturity of three months or more – should be considered as cash flow. Longer term investments are not considered part of your business’ cash flow because the money invested is usually not immediately accessible and can fluctuate with the market.

Positive cash flow

Positive cash flow occurs when a business’s incoming money exceeds its outgoing expenses. Reaching a positive cash flow point is an important step for new businesses.

Negative cash flow

If your statement shows negative cash flow, it means that during the period assessed, your business transferred more money than it received. Rest assured, this does not mean that you are in danger. You can go through negative cash flow at certain times of the year if your product or service is seasonal. And if you have a new business, you can keep negative cash flow until you build a consistent customer base.

The net cash flow

The difference between outgoing and incoming cash flow is called “net cash flow”. In other words, it represents the change in your company’s cash flow over the period covered by your statement. Tracking your business’s free cash flow over time can be helpful.

Free movement of capital

A company’s free cash flow is the money left over after it has paid all expenses and reinvested money into the business, for example by purchasing equipment, hiring new staff, and by making financial investments. Free cash flow is generally of interest to shareholders and is often included in a statement of cash flows.

Operating cash flow

Operating cash flow is the money a business generates from its business activities alone, not from investors. This is an essential part of a cash flow statement because it is a great indicator of the strength of your business.

What are the other types of financial statements?

Fundraising activities such as applying for loans or courting potential investors often require multiple financial statements. In addition to a cash flow statement, these three documents may be required, depending on the nature of your business and the fundraising activities you pursue:

What resources can support cash flow statements?

Financial tracking can be a daunting task. These accounting resources will help you create an effective cash flow statement.

Accounting software

The best accounting software applications have a pre-configured report for cash flow statements. You can also find a template online if you don’t use any software yet. If you are using a template, be sure to choose one that fits your needs and your reporting schedule.

Accurate tracking is an important task in managing your business finances. Without precise monitoring, even the best model, income statement or balance sheet will be useless. Accounting software that helps you manage your financial tracking usually pays for itself in the short term.

Security and Trade Commission

The United States Securities and Exchange Commission publishes many useful guides, such as the Beginner’s Guide to Financial Statements. If you’ve never read a balance sheet or put together an income statement, this will give you the information you need.

Dachondra Cason contributed to the writing and research of this article.


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