A cash flow statement is a document produced by an accountant detailing the flow of cash (and cash equivalents) into and out of a business. It is one of the four main financial statements produced by a business.
But why does your business need a cash flow statement and what does it look like?
To put it simply, a cash flow statement helps a business owner understand how well their business generates cash. Cash is needed to fund operating costs and also pay off any debt obligations. The cash flow statement allows the business owner to see how well the company functions on a daily basis.
A cash flow statement tends to be split into three parts. These three parts detail one of three sources of cash flow: financing activities; investment activities; and operating activities.
Firstly, financing activities refers to the influx of cash from bank loans or investors. It can also refer to cash paid to shareholders.
Secondly, investment activities tend to deal with changes in the value of assets or equipment. This could be from buying or selling a building or equipment used in manufacturing.
Finally, operating activities are probably the most common and frequent sources of cash flow. Essentially, this refers to the cash generated by the general activity of the business. Any kind of operating expense falls under this category, as well as income received from the sales of goods or services. Payments made to suppliers and tax contributions are also considered operating activities.
How do you calculate your cash flow?
Your cash flow statement is a bit complicated to put together. All your non-cash items are calculated and represented on either a balance sheet (for assets and liabilities) or an income statement. In order to make a cash flow statement, you have to re-evaluate all your financial accounts as not all transactions involve cash.
To calculate your cash flow, you can use one of two methods: direct or indirect.
The direct method of calculating your cash flow simply involves using your receipts and invoices to tot up all your cash payments or receipts. This could be cash transactions to suppliers or receiving payments from customers.
The indirect method, on the other hand, involves using your income statement. The first step is to take the net income from the income statement. Subsequently, you must adjust ‘earnings before interest and taxes’ (EBIT) for transactions that affect the net income. This is because the income statement is prepared using an accrual basis method. That means there are certain entries in the income statement that have not yet been processed. Accrual basis accounting records transactions when they are made as opposed to when cash exchanges hands.
This is a pretty complicated affair. If you think you could do with a helping hand, check out what Count can do to help ease your financial worries.
Your Bottom Line
Like the other main financial statements, a cash flow statement is an integral tool to a business owner. By creating one – or having one created for you – you can get an insight into the financial strength and profitability of your business. This helps you see the health of your business; not just the present health but your capability going into the future.
Creating a cash flow statement isn’t just for you to see how your company performs. It can also be used to help bring investors on board or apply for a bank loan.
You didn’t start a business to create financial statements – but we did! So, if you need help, just take a look at some of our other educational guides.
Alternatively, if you’re ready to outsource your bookkeeping and accounting needs, check out our pricing here.