What is a cash flow statement?

Keeping tabs on money coming in versus money going out is the hub of small business finance. And the document that does this is called a cash flow statement.

This statement helps small businesses see where cash flow is coming from and how it is being spent. They are an important way to manage finances.



What is a cash flow statement?

These cash flow statements are an important part of financial accounting. They are also called cash flow statements.

Wondering what cash flow is? These financial statements are broken down into financing, investing and operating activities. They include the net income of a business and there is a method to calculate the amount of free cash.

Wondering what a P&L statement is and how does it fit in? These provide additional cash flow information. Read on to find out what makes one, how to calculate cash flow, and other important aspects.

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 the financial health of a business.

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

Businesses experiencing negative cash flow can wait for payments. Offering early payment discounts can promote positive cash flow.

Purpose of a cash flow statement for small businesses

A cash flow statement shows how cash and cash equivalents move through a business. This is an overview of the cash generated. It provides an overview of business operations by supplementing the balance sheet and income statement.

Are you wondering “What is a balance sheet?” or “What is an income statement?” The first shows what a company owns and owes. The second term highlights what he did. Both work with a cash flow statement to provide a clear picture.

Here are four other uses for these financial statements.

Plan loan repayment

Understanding cash flow can help your business decide how to integrate these payments. And for capital expenditures and budget decisions that need to be made after reviewing the cash flow statement.

To better understand the expenses

These provide a picture of cash payments that might not be found in the income statement. A good way to get an accurate picture of the actual cash position with what is on the balance sheet.

To get a better picture of your cash balance

Calculating cash flow is essential. They provide a good overview of treasury activities. Whether there is sufficient cash in your bank accounts for any accounting period. Be precise. For example, gross cash receipts include costs and expenses.

Manage a crisis

Financial statements that include cash flows and cash equivalents report surpluses or deficits. Forecasting cash flow issues can lead to proactive plans. Like taking a quick look at accounts payable.

Main Components of a Cash Flow Statement

A company’s cash flow should tick a few boxes. This type of financial analysis should include everything from non-cash expenses to investment figures and receipts, to name a few.

Here is a list of some of the major components.

1. Operational activities

Operations are often the first section. It measures the cash earned and used by a business. The company’s financial statements here include accounts receivable, unearned revenue, and non-cash items like prepaid insurance.

This section details how the business generates cash.

2. Investing activities

This section detailing investing activities includes fixed assets and shows investment gains and losses. Land and buildings, vehicles and other long-term investments are included to generate investing cash flow. Purchases or sales of equipment and goods also count.

3. Fundraising activities

Another important part of a cash flow picture is to report all the money spent repaying lenders and borrowers. These fall under the umbrella of cash outflows from financing activities.

4. Net income figure

Each statement begins with net income, or net money made. It is the most important, measuring the capacity of the company and its ability to generate cash.

5. Operating expenses

These expenses occur during normal business operations, so be careful with them. Cash paid in the form of wages or salaries to full-time staff is an operating expense on a company’s balance sheet. Legal fees, accounting services, office supplies and utilities also count.

6. Non-operating expenses

These appear at the bottom of an income statement that includes costs that are not day-to-day. Like interest paid on bank charges and amortization plus depreciation.

Sample Cash Flow Statement

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

QuickBooks provided this template. Note that certain non-monetary income such as appreciation must be included.

How to Prepare a Cash Flow Statement

Trying to predict future cash flows depends on a detailed statement. Here are some steps you can follow for this purpose.

Remember to follow generally accepted accounting principles (GAAP). Figures must be accurate and include operating income for income taxes.

  • Gather information and data – compile contract files and documents to arrive at a net cash flow.
  • Find a starting balance – must include the balance of cash equivalents and cash disbursements.
  • Calculate the first cash flow – this number comes from operating activities.
  • Do the same for investment activities – the focus is on the purchase and sale of equipment, facilities and goods.
  • Calculate cash flow for financing activities – notes payable are included. Like repaying debts to creditors and investors. Financing cash flow figures should reflect each fiscal period.

Analyze a cash flow statement

A good financial statement analysis will also cover sales transactions that are not cash. It can help gather the coins when you are looking for more money.

Use the direct method

The direct method is simple, just subtract the cash outflows from the cash inflows. Actual cash flow examples include what is paid to vendors.

Use the indirect method

This one is a little less simple. Take the net income and then work out the depreciation. The indirect method takes into account non-monetary transactions such as depreciation and fixed sales losses.

View operating cash flow/net sales

This is a ratio highlighting the amount of money generated for each sale. It is expressed in dollars.

Calculate free cash flow

This shows how good a small business is at generating cash. Calculate free cash flow from a cash flow statement. Take operating cash flow and subtract capital expenditure.

Analyze free cash flow without leverage

These are the cash inflows of a business before items such as interest payments are taken into account. Here is the formula.

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