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What is a cash flow statement?

Capitalise Aug 17, 2023

A cash flow statement offers a detailed snapshot of a company's cash inflows and outflows during a specific period. 

Whether you're a business owner, an investor, or simply someone looking to understand financial statements, this article will break down the essentials of a cash flow statement and explain why it's a crucial aspect of financial analysis. 

What is a cash flow statement?

A cash flow statement is a financial document that provides a clear and concise overview of a company's cash movements over a specified period, typically a fiscal quarter or year. 

It should show how cash enters and exits the company through its operational, investing, and financing activities. The statement will help stakeholders understand the sources and uses of cash within an organisation, giving a more accurate picture of its financial health, than just examining profit or loss figures.


What does a cash flow statement show?

A cash flow statement will show the uses of cash within a business, it will evaluate its liquidity position, and how cash flow contributes to overall financial performance. A cash flow statement can be used to complement other financial statements, providing insights into cash management practices, solvency, and future cash flow generation.


Key components of a cash flow statement

A typical cash flow statement is divided into three main sections: operating activities, investing activities and financing activities. These sections each outline the different categories of a company's cash flow.


1. Operating activities

This section covers the company's core business operations, detailing cash transactions related to the production and delivery of goods or services. It includes items like cash received from customers, payments to suppliers, and payments to employees. A positive cash flow from operating activities is generally a positive indicator of a company's ability to generate cash from its day-to-day operations.

2. Investing activities

The investing activities section of a cash flow statement outlines cash flow associated with the acquisition or disposal of long-term assets. This includes purchases and sales of property, equipment, investments, and other assets not considered part of the company's core operations. Negative cash flow in this section might indicate heavy investment in the company's future growth.

3. Financing activities

The financing activities section reveals the company's transactions with its owners and creditors. It includes cash flows related to raising capital, repurchasing stock, paying dividends, and servicing debt, such as any business loans. Financing activities can give insights into how a company is funded and its relationship with shareholders and lenders. 


Why is a cash flow statement important?

Understanding a cash flow statement is important for several reasons:


  • It gives a realistic financial picture

While a profit and loss statement reflects profitability, it doesn't account for cash movements. A company can be profitable but still experience cash shortages due to delayed payments or high investments. The cash flow statement provides a clear view of actual cash availability.

  • Helps in assessing sustainability

By analysing a cash flow statement, investors can evaluate whether a company's cash flows are sustainable over the long term. Positive cash flow is a sign that a company is generating enough cash to cover its operating expenses.

  • Financial planning

A cash flow statement helps companies plan for future investments and manage their cash more effectively. It identifies periods where there may be a cash flow gap, allowing the company to take proactive measures, such as applying for a business loan.

  • Lender and investor confidence

Lenders and investors sometimes review a company's cash flow statement to assess its ability to repay debts and generate returns on investments. A healthy cash flow can improve a company's creditworthiness and attractiveness to potential investors.
The cash flow statement can be a useful tool for understanding the financial health of a company beyond the numbers presented in other financial statements.

As a business owner, mastering the basics of a cash flow statement can provide you with a more comprehensive understanding of your company’s financial performance and future prospects.


Different methods for preparing a cash flow statement

There are two different ways to prepare a cash flow statement: the direct method and the indirect method. Here’s how they work.


Direct method cash flow statement

This approach lists cash receipts and payments from operating activities directly. It provides a more granular view of cash flows from customers, suppliers, and other operating activities. While the direct method does offer transparency, it also requires careful and detailed tracking of cash transactions, which may be difficult for some companies.


Indirect method cash flow statement

The indirect method starts with net income and adjusts it for non-cash items and changes in working capital to derive cash flows from operating activities. Although less detailed than the direct method, it relies on readily available financial statements, making it a popular choice.


How to prepare a cash flow statement

Preparing a cash flow statement involves several steps to accurately capture the movement of cash within a business over a specific period. 

Here's a step-by-step guide for how to prepare a cash flow statement:


1. Decide on the reporting period
First you’ll need to decide which period of time you’re preparing the cash flow statement for, this could be monthly, quarterly, or annually.

2. Gather financial data
Next you’ll need to collect relevant financial information from your company's accounting records, including the balance sheet, income statement, and other transaction records. Ensure that the data is up to date and accurate for a true representation of cash flows.

3. Identify cash flows
You’ll need to group cash flows into three main categories: operating activities, investing activities, and financing activities. 

Operating activities involve cash flows from day-to-day business operations, such as sales, purchases, and expenses. 

Investing activities are cash flows related to investments in assets or securities, such as property, plant and machinery purchases or sales. 

Financing activities include cash flows from borrowing, repaying debt, issuing or repurchasing equity, and paying dividends.

4. Choose a method
Decide whether to use the direct method or the indirect method to prepare the operating activities section of the cash flow statement.

5. Organise the cash flows
Organise the cash flows into the appropriate sections of the cash flow statement. You can then summarise each section to calculate the net cash flow for the reporting period.

6. Reconcile cash flows
Ensure that the total cash flows from operating, investing, and financing activities reconcile with the change in cash and cash equivalents reported in the balance sheet between the beginning and end of the reporting period.

7. Review and finalise
Review the prepared cash flow statement for accuracy and consistency. Make any necessary adjustments or corrections before finalising the statement and presenting it to any stakeholders. 

By following these steps you should now be able to prepare your cash flow statement and fully understand your cash flow over a specific period of time. 

Looking to boost your cash flow?

Having access to short term finance gives you the flexibility to boost cash flow when you need it. 

At Capitalise, we work with 100+ business lenders to help find the right option for your business. So if you’re looking to cover a cash flow shortfall, just search for funding and one of our dedicated funding specialists can help. 

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