The cash flow statement holds significant importance as a financial report for businesses. Alongside the balance sheet and profit and loss statement, it provides crucial insights into the financial well-being of a company. Investors and financial institutions often rely on the cash flow statement to evaluate profitability.
Essentially, a cash flow statement serves as a concise summary of the budget, highlighting the changes in a business’s cash and cash equivalents. It acts as a connecting link between the balance sheet and income statement, offering a clear picture of how money flowed in and out of the organization.
What sets the cash flow statement apart is its user-friendly nature. It presents the movement of money within the business through three key categories: operations, investments, and financing. The combination of these segments yields the net cash flow figure, providing a comprehensive overview of the business’s cash position.
Advantages of a Cash Flow Statement:
- Assessing Profitability and Liquidity: The cash flow statement enables management to evaluate the profitability and liquidity positions of a business. It provides insights into a company’s ability to meet its financial obligations and determines its cash position when payments are due.
- Verifying Capital Cash Balance: By examining the cash flow statement, businesses can verify their capital cash balance. This helps identify excess, idle, or shortage of cash, allowing management to invest surplus funds or arrange external financing to address cash shortfalls.
- Effective Cash Management: A well-prepared cash flow statement facilitates efficient cash management. It enables management to forecast cash inflows and outflows, aiding in future planning and ensuring optimal utilization of cash resources.
- Planning and Coordination: Cash flow statements are typically projected for the upcoming year, providing valuable information for planning and coordination. The statement helps determine funding requirements, assesses the generation of internal cash, and identifies the need for external financing. It also aids in creating cash budgets and aligning various activities within the organization.
- Reliability and Dependability: Compared to accrual-based accounting, the cash flow statement is considered more reliable and dependable. It involves fewer technical adjustments and presents a clearer picture of the actual cash movements within the business. This enhances the statement’s credibility for decision-making purposes.
Here’s a list of the process for preparing a cash flow statement:
- Gather financial information.
- Identify cash flow categories: operating, investing, and financing.
- Calculate operating cash flows.
- Calculate investing and financing cash flows.
- Prepare the cash flow statement: organize information into categories.
- Reconcile net cash flow: calculate overall change in cash.
- Review and analyze the cash flow statement.
- Ensure accuracy and compliance.
List of the key deliverables of a cash flow statement:
- Net Cash Flow: Overall change in cash during a specific period.
- Operating Cash Flow: Cash generated or used by the core operations.
- Investing Cash Flow: Cash flows related to investments in assets or their sale.
- Financing Cash Flow: Cash flows related to obtaining or repaying capital.
- Changes in Cash Position: Movement of cash within the business over time.
- Cash Flow Ratios: Ratios that provide insights into financial health and performance.
- Decision-Making Insights: Information for making informed investment and financial decisions.