Cash flow statement
A cash flow statement is a financial document that shows a business's cash inflows and outflows over a specific period. It tracks all sources of cash inflows, including sales, loans, investments, and other sources, and all cash outflows, including expenses, loan payments, and investments. The cash flow statement helps businesses understand their current cash position and forecast future cash flows, making it an essential tool for managing finances.
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Pages in this SectionHow do you use a cash flow statement?
The cash flow statement allows an investor to see how well a company can generate cash and where the sources of that cash generation are. The cash that is available to pay a company’s debt obligations and general operating expenses provide important information to determine whether the business is in a strong financial position.
It also allows you to see changes in the cash position of a company from one period to another and can provide useful information for creditors to ascertain the liquidity of the company and help assess the risks of lending.
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Key takeaways
- A cash flow statement is a financial document that tracks the movement of money in and out of a business's accounts.
- It helps businesses understand their current cash position and forecast future cash flows.
- There are three types of cash flow: operating, investing, and financing.
- The cash flow statement differs from the income statement and balance sheet, as it focuses on cash movements rather than profits or assets/liabilities.
What are the advantages and disadvantages of a cash flow statement?
Advantages of a cash flow statement:
- It is helpful to see how effective a company is at generating cash flow to fund its operating expenses.
- It can determine the cash position of the company for a particular period
- A cash flow statement can help to ascertain the optimum cash position for the company
- It can show the cash earning capacity of a company
- Provides information to help management planning and budgeting
- Clearly shows a comparison between actual cash flow with projected cash flow
Disadvantages of a cash flow statement:
- It can be inaccurate - cash spending can be delayed and manipulated in order to improve the cash flow in a particular period
- It doesn’t give a complete picture of the company’s financial position
- Its actual liquidity cannot be assessed only ascertained from a cash flow statement
- It is not a useful tool for the comparison of similar firms
What are the different types of cash flow?
There are three types of cash flow you need to include in a cash flow statement:
Operating cash flow
This represents the cash generated from a business's core operations, such as sales or services.
Investing cash flow
This represents the cash used for investments in long-term assets, such as property, equipment, or securities.
Financing cash flow
This represents the cash used for financing activities, such as loans or issuing stock.
How do you prepare a cash flow statement?
To prepare a cash flow statement, start by summarising all cash inflows and outflows for the specific period you are tracking. Next, organise these cash movements into the three different types of cash flow: operating, investing, and financing. Once you have your cash movements organised, you can create a cash flow statement by summarising the inflows and outflows for each category.
How to summarise cash inflows and outflows
Here's an example of how to summarise the cash inflows and outflows of a cash flow statement:
Operating Activities
Cash inflows
Sales revenue: £500,000
Accounts receivable: £100,000
Total cash inflows: £600,000
Cash outflows
Cost of goods sold: £300,000
Salaries and wages: £100,000
Rent and utilities: £50,000
Total cash outflows: £450,000
Net cash flow from operating activities: £150,000 (total cash inflows minus total cash outflows)
Investing Activities:
Cash inflows
Sale of property: £200,000
Total cash inflows: £200,000
Cash outflows
Purchase of equipment: £150,000
Total cash outflows: £150,000
Net cash flow from investing activities: £50,000 (total cash inflows minus total cash outflows)
Financing Activities
Cash inflows
Issuance of common stock: £100,000
Total cash inflows: £100,000
Cash outflows
Repayment of loan: £50,000
Total cash outflows: £50,000
Net cash flow from financing activities: £50,000 (total cash inflows minus total cash outflows)
Overall, the net cash flow for this business is £250,000 (the sum of the net cash flows from each category). This represents the total increase or decrease in cash for the period covered by the cash flow statement. Understanding your net cash flow is crucial for managing your cash flow effectively and making informed financial decisions for your business.
Have you ever thought about invoice finance to help improve your cash flow?
Invoice finance allows you to release cash quickly from your unpaid invoices.
As your lender, we can release up to 90% of your invoices within 24 hours. On payment of the invoice from your customers, we will then release the final amount minus any fees and charges. There are different types of invoice financing options available to businesses depending on the situation and the level of control they require in collecting unpaid invoices.
We are an invoice financing company who offer a solution whereby payments are collected on your behalf managed by our team of expert credit controllers so you can focus on running your business. Our Confidential Invoice Discounting solution is offered to businesses who want to maintain their own credit control processes, therefore this remains strictly confidential so your customers are unaware of our involvement.
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