Feeling overwhelmed and intimidated by the prospect of managing finances?
Whether it’s personal or professional, money management is an essential part of financial health and security. But it doesn’t have to cause you stress!
Understanding a cash flow statement is a great place to start learning and taking responsibility for managing the money coming in and going out.
Keep reading to find out how to create a cash flow statement and why it’s so important.
What Is a Cash Flow Statement?
A cash flow statement is a financial summary of cash (or cash equivalents, like stocks) coming in and going out of a company.
The cash flow statement is used as an indicator of how well a company is managing their income to fund their own expenses and pay any debt they owe. Companies submit the cash flow statement along with a balance sheet and income statement as
The cash flow statement complements the balance sheet and income statement and is a part of the company’s mandatory financial reporting.
How To Create A Cash Flow Statement
A cash flow statement generally has three distinct sections. First, a report of cash from operating activities. Second, cash from investing activities, and third cash from financing activities. There may also be a section for disclosure of non-cash activities.
The operating activities report will include how much cash is coming in as a result of the products or services a company is offering. This will also include any money paid to employees or for renting an office or storefront.
Cash from investing activities includes any sale or purchase of property, equipment, or other non-current assets. It will also include any buying or selling of securities if the company is active in the stock market.
Financing activities detail any loans taken out by the company, stock issued, or payment of dividends.
These three sections are the essential information needed to create a cash flow statement.
Direct Versus Indirect Cash Flow Method
There are two methods to calculating cash flow, direct and indirect. The direct method reflects all cash payments and receipts. It is calculated using the beginning and ending balances of any relevant business accounts.
The indirect method begins with the net income reflected on the company’s income statement. This method also allows a company to add any non-operating activities if they do not affect the operating cash flow.
If you’re looking for advice on managing cash flow, check out these cashflow tips for the new financial year.
Cash In, Cash Out
The cash flow statement is essentially just a collection of information on the total cash a company brings in and how much it spends.
It allows a company to assess their financial health and investors to make informed decisions. It can also be assessed by creditors to determine whether the company can pay owed debts.
The cash flow statement along with the balance sheet and income statement are essential for any business to succeed financially.
If you want to learn more about financial statements and all things business, check out some of our other blogs!
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