Need to make a financial snapshot of your business! You need to understand profit and loss, although it doesn’t tell you the whole story. You may need to have a detailed picture of what happened to your business’s income during the accounting period. You need to understand the concept behind a cash flow statement and other financial documents, even if you are a working professional, business owner, entrepreneur, or investor. When you know how to read and understand a cash flow statement, it helps you obtain vital data related to the financial state of a company. To facilitate this understanding, here’s everything you need to know about how to read and understand a cash flow statement.
What is a cash flow?
Cash flow refers to the inflow and outflow of the amount of cash or its equivalents in business. In finance, the term determines the amount of money consumed or generated for a specified period. It also analyses the existing sources of the flow of cash along with a possible scope of inflows. Once calculated, cash flows can result in a negative or positive balance. A positive balance implies that the company has sufficient cash to fulfill its immediate liquidity requirements, while a negative tally indicates a constricted liquidity.
What is a cash flow statement?
A cash flow statement is a regular financial statement telling you how much cash you have on hand for a specific interval. The cash flow statement makes adjustments to the information recorded on your income statement, so you see your net cash flow—the precise amount of money you have on hand for that period. The current flow of cash for a given period is identified by reducing the opening balance of a given period from its closing balance.
Why do you need cash flow statements?
Cash flow statements are an essential part of financial analysis. They show you changes in assets, liabilities, and equity in the forms of cash outflows, cash inflows, and cash being held. You can use cash flow statements to create cash flow projections. On top of that, if you plan on securing a loan or line of credit, you’ll need up-to-date cash flow statements to apply.
Benefits of a Cash Flow Statement
- Verifying Profitability and Liquidity Positions- It helps the management to ascertain the liquidity and profitability position of businesses.
- Verifying Capital Cash Balance – Businesses can verify the idle and/or excess and/or shortage of cash position if the capital cash balance is determined.
- Cash Management – If the Cash Flow Statement is properly prepared, it becomes easy for you to manage the cash.
- Planning and Coordination – This helps the management to understand how much funds are needed and for what purposes, how much cash is generated from internal sources, how much cash can be procured from outside the business.
- Superiority over Accrual Basis of Accounting – As many technical adjustments are made in the latter case, Cash Flow Statement is more dependable than the collecting basis of accounting.
Cash flow statement format
Cash flow is calculated by making certain adjustments to net income by adding or subtracting differences in revenue, expenses, and credit transactions resulting from transactions that occur from one period to the next. As a result, there are two methods of calculating cash flow: the direct method and the indirect method.
1. Direct Cash Flow Method
The direct method subtracts the money you spend from the money you receive. The direct method adds up all the various types of cash payments and receipts, including cash paid to suppliers, cash receipts from customers, and cash paid out in salaries.
2. Indirect Cash Flow Method
While preparing the Cash Flow Statement as per the Indirect Method, Non-Cash and Non-Operating charges in the Income Statement are added back to the Net Profits while Non-Cash & Non-Operating Credits are deducted to calculate the Operating Profit before Working Capital Changes.
Activities of Cash Flow Statement
It covers three key aspects of your business activities that are as follows:
- Cash Flows from Operating Activities
This refers to regular business activities. Inflows include revenue from selling products or services, dividends received by the business, interest, and other cash receipts,Outflows include payroll, overheads, taxes, and payments to suppliers and vendors.
2. Cash Flows from Investing Activities
This refers to gains and losses from investments. Inflows include sales from business assets and payments from loans made by your business, Outflows include purchases of assets and loans made by your business.
3. Cash Flows from Financing Activities
This refers to capital that’s raised externally. Inflows include any money that’s been borrowed, as well as sales of your company’s securities. Outflows include dividend payments and servicing debt. Cash flows from financing activities are cash transactions related to the business raising money from debt or stock, or repaying that debt.
Cash Flow Statements are an integral part of Financial Statements. To gain a deeper understanding of Cash flow, join our upcoming 3 DAY Workshop.
- What You Will Learn From this Workshop
- A detailed insight into how to Read a Cash Flow Statement.
- What are the different types of Cash Flow Statements available?
- How to utilize the Cash Flow Statements for making business decisions?
- And more…
PAYAL MOTLA is a Financial Consultant having a total of 8 years of experience in the field of Chartered Accountancy. Works as a Freelance Trainer in the areas of Finance and Taxation. Experience in taking live sessions on Finance and Taxation. Immense work experience in ITR Preparation, Finalization of Accounts, Bookkeeping, Internal Audits, Preparation of Scrutiny Paperwork, etc. This ensures that quality and experience are delivered to the students who wish to study Finance with her.