What is a Cash Flow Statement

Cash flow statements give an overview of a company's income and expenses over a specific time period, typically monthly or annually. They also give managers insight into when expenses are due, enabling them to plan and budget effectively. In short, cash flow statements are essential tools for understanding a company's financial health and ensuring it has the funds to pay its bills. The company's Financial Controller can track the organization's liquidity over time with the help of these statements.

Synonyms

• Statement of Cash Flows
• Cash Flow Report
• Funds Flow Statement
• Liquidity Statement
• Cash Flow Analysis

Elements of a Cash Flow Statement

There are three main categories of cash flow statements which are financing activities, investing activities, and operating activities.

1. Operating Activities

Core business operations are included in the cash flow statement as operating activities. This section calculates the cash flow resulting from a business offering goods or services. Sales of goods and services, rent and wage payments, and income tax payments are a few examples of operating cash flows.

2. Investing Activities

Long-term investments in the growth of the business, such as buying or selling tangible assets like real estate or cars, as well as intangible assets like patents, are included in investing activities, which are defined as cash flows from the acquisition and disposal of long-term assets and other investments not included in cash equivalents.

3. Financing Activities

Any finance sources that a company needs to operate are referred to as "financing activities". This group includes capital investments made by owners or shareholders as well as debts obtained via borrowing (loans). Financing activities also involve interest and principal repayment on loans made by the company.

Importance of Cash Flow Statements

Having enough money in your bank account to cover your expenses is similar to having cash flow. You can’t pay for suppliers, staff, or rent if you don’t have enough money coming in. Business plans are created using a cash flow statement, much like personal budgets.

Banks and investors are more likely to lend you money or make investments in you if you have a strong cash flow. It functions similarly to how getting a loan is made easier by a high credit score.

How the Cash Flow Statement Is Used

An investor can use the cash flow statement (CFS), also known as the statement of cash flows, to make more informed investment decisions by knowing how a company is running its operations, where its money is coming from, and how it is spending it. The CFS is also important to creditors because it tells them how much cash is available (also known as liquidity) for the company to pay down its debts and fund its operating expenses.

How to Prepare a Cash Flow Statement

1. Compile Your Financial Statements.

Gather the required financial statements before starting:

• Income Statement: Gives details on earnings, outlays, and net income.
• Balance Sheet: Displays the company's equity, liabilities, and assets at the start and finish of the given time. 

2. Establish the Time for Reporting.

Determine the time frame for which the cash flow statement is being prepared. This might occur on a monthly, quarterly, or yearly basis.

3. Select the Approach

Select the approach you want to use to prepare the CFS: direct or indirect.

• Direct Method: In the direct method, every monetary payment and receipt made during the reporting period is listed.
• Indirect Method: This method begins with net income and modifies it to account for variations in non-cash transactions.

4. Get Your Statement Ready.

Operating Activity Cash Flow;

• Direct Method

• • 1. Include cash received from clients in the list of cash receipts.
    2. Include cash payments made to workers, suppliers, and income taxpayers on your list of cash payments.
    3. Calculate the operational activities' net cash flow: Total cash payments are deducted from total cash collections.

• The Indirect Method

• 1. Start with net income: This may be acquired from the income statement.
  2. Add non-cash items to the total: Sum up repayment and loss of value.
  3. Account changes in working capital: Take note of any changes made to the accounts payable, inventory, receivable, and other working capital accounts.
  4. Calculate the operational activities' net cash flow: Mix the working capital changes with the adjusted net income.

• Cash Flow via Investing Activities

1. Identify the cash transactions related to investments: These transactions should include the cash paid for or received from investing in securities, the cash obtained from selling assets, and the cash spent on buying fixed assets.
2. Calculate the net cash flow from your investment operations: Cash proceeds from investment sales are subtracted from cash payments for investments.

• Financing Activities Cash Flow

1. Identify the financing-related cash transactions: Add the funds obtained from debt or stock issuance to the funds used for debt repayment or stock buybacks.
2. Calculate the net cash flow from financing-related operations: Deduct the cash payments for financing operations from the financing activities' cash revenues. 

5. Combine Every Section

To find the total change in cash and cash equivalents for the period, add the net cash flows from financing, investing, and operating activities. 

6. Balance with Initial Cash

To determine the ending cash balance and make sure it corresponds with the cash balance shown on the balance sheet, add the cash change to the beginning cash balance.