Statement of Cash Flow, What You Should Know

How does one remain on target for sales goals or assess how effectively your company handles revenue and expenses? The answers lie within your statement of cash flow. One of the most effective measures of your company’s overall financial health, being able to analyze and calculate cash flow is essential.     

What is a Statement of Cash Flow?

Cash flow is the net amount of cash that’s transferred in and out of your business – literally, the way money is gained and then used within an organization. A statement of cash flow consolidates the data from these transactions into a report that shows how well your business managed its cash for a certain period of time.

What Does a Statement of Cash Flow do?

Statements of cash flow are important for showing how well the company is redistributing its wealth, which is useful for assessing financial stability. A statement of cash flow can also help investors gauge the sustainability, growth potential, and risks of your business. Being able to correctly populate and analyze a cash flow statement will give you a clear picture of where your expenses lie and whether you are achieving financial targets. You can also use the data gained from statements of cash flow to make better business decisions and instill lasting organizational improvements.

What’s in a Statement of Cash Flow?

A Statement of cash flow generally centers on three criteria: 

• Operations: These includes transactions used to fund key activities like marketing, supply purchases, payroll, and vendor payments. This area of the cash flow statement also looks at the income gained as a result of the work done for the period in question. An example of this would be the sales amount from products sold.
• Investing Activities: This category focuses on transactions used for investment purposes such as the buying or selling of a long-term asset account. This is also where you track  Property, Plant, and Equipment (PPE). PPE are long-term assets that are required to allow for business operations. These include physical tools or structures, like your office building, that are needed to perform work tasks. It’s important to take into consideration the lifespan and value of these assets over time; this is where you track costs and the depreciation of these assets.
  
• Financing Activities: Financing activities reflect external transactions conducted to help businesses raise capital. Amounts from activities like taking out loans and purchasing stock all fall into this category. In addition to listing the amount of capital raised during the period, the cash flow statement also looks at the repayment of financing activities, like repaying investors.

How do you Calculate Cash Flow?

Cash flow is calculated by making adjustments to the net income that the company has gained over the selected period of time. Depending on the specific transactions that occurred over the reporting period, accountants will add to or subtract from the revenue. Again, the transactions will fit into the categories above and will all contribute to the final cash flow statement. This is because the income brought in from business activities must also be used to fund the business.

An addition to the cash flow statement could include a period of deferred revenue that has been recognized as regular revenue. A subtraction could be an insurance payment. The assets and liabilities of the company are also taken into account – while not cash, these contribute to the business process. For example, some assets will experience depreciation, a decrease in value, as time goes on. This may necessitate replacements, repairs, or other expenses to compensate for the depreciation.   

Methods for Cash Flow Calculations

Cash flow can be calculated and recorded using either the direct or indirect method.

The direct method takes all the actual cash transactions and combines them – everything from client cash receipts to money paid towards a business loan. The total is then adjusted by examining the beginning and end balances of the accounts that the business used in the respective operations. Measuring the net decreases and increases of these accounts provides a solid figure of cash flow.  

The indirect method examines the net income for a selected period – all the money earned and recognized. Adjustments are then made to the amount earned based on income, taxes, and expenses to paint a complete picture of transactional activity. This lets the accountant examine how much money was respectively earned and used to pay for operations, investing, and financing during that specific time frame. 

Drill Deeper into Your Cash Flow

Struggling to efficiently compile and analyze your statement of cash flow in your current accounting system? Accounting Seed makes it easy to create all the accounting reports you need without any additional plugins or software. Click a button and your report is generated with drill-down to source transactions you can use to get concrete answers regarding cash flow. We’ll help you get more out of your data while spending less time entering the numbers.