A cash flow statement is a financial statement that shows how much cash a company has generated and used during a specific period.
This statement is important for businesses because it can help them make informed decisions about where to allocate their resources.
In this blog post, we will discuss what a cash flow statement is and how it can be useful for businesses in the United Kingdom!
So, what is a cash flow statement?
As mentioned, a cash flow statement is a financial statement that shows how much cash a company has generated and used during a specific period.
A cash flow statement can be divided into three sections: operating activities, investing activities, and financing activities.
Operating activities involve the generation and use of cash from a company’s core business operations. This section includes items such as sales, salaries, and expenses.
Investing activities involve the purchase or sale of long-term assets such as property or equipment. This section also includes items such as dividends received from investments.
Financing activities involve the raising and repayment of capital. This section includes items such as issuing new shares, taking out loans, and repaying debt.
The cash flow statement can be a valuable tool for business owners and managers. It can help them to understand the sources and uses of cash within their business, and make informed decisions about where to allocate their resources.
Why is a cash flow statement so important?
We've said it before, and we'll say it again. Cash flow is king!
On the off chance you aren't aware of its importance, Cash flow is the lifeblood of any business. It is the measure of actual cash that is coming in and going out of a company.
You may also have heard this referred to as liquidity, and it is what allows a business to pay its bills, expand operations, make investments, and ultimately generate profits.
A business that doesn't have positive cash flow will eventually run into trouble. This is because they won't be able to cover their expenses, and may even find themselves in debt.
Even if you have lots of money coming in, if it is tied up in inventory or other assets, it won't do you any good if you can't convert it to cash.
This is obviously not a sustainable situation, and is one of the main reasons businesses fail.
That's why it's so important to keep a close eye on your cash flow statement, and to understand where your cash is coming from and where it's going.
So how does a cash flow statement help?
Well, by showing you where your money is coming from and where it's going. This information can be invaluable in making decisions about how to allocate your resources.
For example, let's say you're trying to decide whether to invest in new equipment or hire additional staff. If you take a look at your cash flow statement and see that most of your cash is coming from your inventory, then new production equipment might be a better investment than hiring more staff.
On the other hand, if most of your liquidity is generated through sales of services, then hiring new personnel might be a better option than investing in new equipment.
However, if you see that most of your cash is coming from loans and credit lines, then you might want to focus on reducing your expenses rather than increasing your income.
In short, a cash flow statement can give you a snapshot of where your business stands financially, and help you make informed decisions about how to move forward. So if you're not already tracking your cash flow, now is the time to start!
Understanding your cash flow statement can help you make informed decisions about how to grow your business. So take the time to learn how to read and interpret your statement, and you'll be on your way to making sound business decisions.
How do you prepare a cash flow statement?
Preparing a cash flow statement can seem daunting, but it doesn't have to be. You can start by tracking your income and expenses for a month, and then estimating for future months.
Estimating is particularly important if you're in the early stages of your business, as you may not have complete data for the past months.
Once you have your income and expense data, you can categorise it into three categories: operating activities, investing activities, and financing activities.
Operating activities include things like sales, cost of goods sold, and expenses. Investing activities include things like purchasing equipment or investing in new businesses. Financing activities include taking out loans or selling equity in your business.
Once you've categorised your income and expenses, you can start to see where your money is going and what areas of your business are costing you the most money. From there, you can start to make decisions on how to cut costs or generate more revenue.
Direct vs indirect method of presentation
There are two ways to present your cash flow statement: the direct method and the indirect method.
The direct method lists all of your cash inflows and outflows from operating activities separately. This approach is more straightforward, but it can be difficult to put together if you don't have good records of your cash transactions.
The indirect method adjusts your net income to show how it would have looked if you had used the direct method. This approach is more complicated, but it's often easier to put together because you can start with your financial statements that are already prepared using generally accepted accounting principles (GAAP).
Both methods will give you the same end result, so it's up to you to decide which one is best for your needs.
No matter which method you use, be sure to keep accurate records of all your transactions. This will help you prepare your statements more easily and ensure that you're reporting all the income and expenses that you should be.
How to make the best use of your cash flow statement
Now that you've understood what a cash flow statement is, why it's important, and how to prepare one, let's look at how to use it.
There are a few key things you can do with your cash flow statement to make the most of it:
- Monitor your cash flow regularly. This will help you to spot trends and see where changes need to be made in order to improve your overall cash flow. Make sure you have a strong handle on your Accounts Receivable and Accounts Payable. This will help you to keep more of your cash flow in your pocket and out of the hands of creditors.
- Analyse your operating, investing, and financing activities separately. This will help you to see where your money is coming from and going to, and what areas of your business are costing you the most money. From there, you can start to make decisions on how to cut costs or generate more revenue.
- Compare your cash flow statement to previous periods. This will help you to see if there are any trends in your cash flow, and whether or not you're improving or worsening over time.
- Look at your cash flow statement in conjunction with your other financial statements. This will give you a more holistic view of your business's financial health.
- Use your cash flow statement to plan for future periods. This will help you to anticipate when you'll need more or less cash, and make sure that you have enough on hand when you need it.
By following these tips, you can make sure that you're getting the most out of your cash flow statement. With a little bit of effort, you can use this powerful tool to improve your business's financial health.
Hail to the king
If cash flow is king, then a cash flow statement is the king’s decree. It is a document that shows the cash inflows and outflows for a company over a period of time, typically monthly or quarterly.
A cash flow statement is critical because it can show you whether your business is generating enough cash to pay its bills and grow.
So, by following the guide above, you can make sure that you're creating a cash flow statement that accurately reflects your business's financial health. With this information, you can make informed decisions about how to improve your company's cash flow and stay liquid!