In business, it always helps to keep up to date on the ins and outs of your company. Whether this is staying aware of all inventory that is shipped out, being aware of any notable employee changes, or ensuring that you stay on the ball with your cash flow statements.
There are a number of notable advantages of a cash flow statement that can guarantee that your business is performing as optimally as it possibly can. This blog will expand on what the main advantages of a cash flow statement are, as well as detail what they are used for, what is included, and more.
What is a Cash Flow Statement Used For?
A cash flow statement is a tool used for managing your finances by tracking the cash flow in and out of your business. It helps organisations manage their cash better and more accurately determine where vital resources should be distributed.
Cash flow statements should be a vital part of your company’s financial plan — it is one of the most important steps in determining the overall performance and viability of your business. It can also be useful when it comes to short-term planning thanks to its use in making cash forecasts.
Your cash flow statement will show the sources of your cash and allow you to better monitor the incomings/outgoings of your money. This information can then be utilised to make more effective decisions regarding operations.
For more information about why having a cash flow plan is important, please check out our blog on the subject.
What is Included in a Cash Flow Statement?
When formatting your cash flow statement, generally there will be three different sections: operating activities that generate revenue for your business, investment activities including all losses and profits made on any investments, and financing activities which cover transactions surrounding debt, equity, dividends, etc.
Let’s take a look at the three vital sections included in a cash flow statement in more detail:
Operating Activities
Operating activities are any activities your business takes part in designed to either generate additional revenue or record money spent when producing a product/service. Examples of operating activities include:
- Manufacturing
- Distribution
- Marketing
- Interest payments
- Wages
- Rent payments
Your operating activities should include a record of your company’s net earnings — this can be used to give an estimate of your profitability and viability at the present time.
Investment Activities
The secondary section of your cash flow statement should include records of all profits and losses your business has sustained as a direct result of investment into assets.
The investment activities section should also make clear reference to your businesses capital expenditure. These investments are vital in business, as they are investments specifically on fixed assets for the future of the company such as buildings, land, or company vehicles. Clear evidence of your business investing heavily in capital expenditure will show that you are investing in future operations. While this is a positive thing, it will lead to a short term decrease in company cash flow.
Financing Activities
The final core section of your cash flow statement should be focused on the extent of cash flow that is dedicated to paying or receiving any debt or equity. Financing activities would include issuing/paying down company debt, paying cash dividends, or issuing/selling stock.
In these types of transactions, incoming cash is recorded whenever capital is raised, and any outgoing cash is recorded when the dividends are paid.
How to Use a Cash Flow Statement
A cash flow statement is used to document the total financial activity and health of your business. It can be utilised to help you to better plan your firm’s immediate future thanks to more accurate representations of current cash surpluses/deficits.
Regardless of how much belief you have in your business, if you are consistently struggling to maintain a healthy cash flow, it is important to get to the bottom of your situation. Having a more clear understanding of your company’s current cash flow forecasts can allow you to make better, more measured decisions with regards to outgoings.
Utilising this form of financial management, you are able to understand more clearly whether your business is operating with a positive or negative cash flow, and you can tweak operations accordingly.
A cash flow statement is also useful to have in the event of any potential investment into your company. Investors can use a cash flow statement to determine how viable your company is for potential investment.
The Benefits of a Cash Flow Statement
Successful businesses — in order to truly be successful — need to have the sufficient amount of cash required to operate. Constructing an accurate cash flow statement will bring a series of key benefits for your business, including details around spending, more information to help you to plan in the short term, and more.
Some of the major benefits of a cash flow statement are as follows:
Appraise Performance
A cash flow statement can be an effective way for management to evaluate the overall performance of the company, or even individual teams/sectors of the business. This can be done by comparing the cash flow statements with projections — any significant differences in these metrics can then be investigated in order to determine where the fault lies.
Track Spending Information
A cash flow statement for your business will give you one of the clearest images possible of what payments your company makes to various parties. From suppliers to creditors, there is always money going out of a business.
Losing track of the outs of your company can prove devastating for its long-term health and viability if left unchecked for a prolonged period of time.
Your cash flow statement will allow you to paint a clear picture of your payments. It will also show any transactions paid in cash that will therefore not be reflected in many other forms of financial statement.
Better Maintain Cash Balance
An accurate and up-to-date cash flow statement will help in ensuring that your company maintains a healthy cash balance.
A successful business is an organised one. Keeping a clear eye on your balance to ensure that there is not too much or too little money in reserve is vital. Excess money in reserve would likely be better utilised to make worthwhile investments or buy vital resources such as additional inventory. Conversely, a major shortage of money in reserve would inhibit your ability to operate.
However, keeping on track and ensuring you always have a clear idea of your company cash balance will ensure that you remain ahead of any potential situation, and can always act ahead accordingly. For example, if you were struggling with cash flow, if you are aware of the situation, you may be able to proactively seek sources to borrow vital funds needed to continue your operations.
Improve Short-Term Planning
Your company cash flow statement is a vital tool utilised by businesses around the world; businesses of all shapes, sizes, and sectors. It will clearly state whether the companies in question currently have the sufficient funds necessary to operate optimally. This information will allow you to plan ahead for any short-term obligations on the horizon. Things like upcoming payments to a regular supplier or creditor.
With an accurate cash flow statement you will be able to analyse your history of incomings/outgoings and plan accordingly — management can utilise a cash flow statement to make plans and co-ordinate the operation.
The Limitations of a Cash Flow Statement
Ultimately, the limitations of a cash flow statement boils down to the fact that cash flow is not the be all and end all of if your business is successful or not. The best use of a cash flow statement is when it’s paired with an income statement and balance sheet, the other commonly used, main forms of financial statements.
A negative cash flow shown in a cash flow statement should not automatically lead to you sounding the alarm and preparing to abandon ship. A negative cash flow can, in some situations, be positive. For example, it could be a sign of an ambitious company looking to expand into new locations/regions.
Your cash flow statement is much better used to analyse any trends in your cash flow from one period to another, to give you a gist of if an intervention is necessary.
Effective cash flow management can be a vital step for your business in ensuring that performance is optimal and everybody is pulling in the right direction. Cash flow difficulties can be crippling for a business, staying on top of it and ensuring that everything is as it should be is vital for the long-term viability and success of the company.
Inquesta has worked to assist businesses in all manner of different sectors, to support them with any potential financial issues. Our experts have seen it all, and possess all the expertise needed to advise you on what financial steps to consider next in order to minimise any possible financial difficulty, and maximise performance wherever possible.
For additional information on how Inquesta can assist you with creating your very own cash flow statements, get in touch with a member of our team today or book a free consultation.