Cash flow statement and business use

The cash flow analysis is a crucial part of the financial reports that helps users in understanding the business position, source of funding, liquidity, business planning, cash management, and other aspects of the financial health of your business. You may want to invest in your marketing but falling shot on buying your raw materials or you have over stock falling short on investing in marketing or your funds getting tied up your capital expenditure. Many of such situations can be avoided with implementing your cash flow forecasts, comparing with actual, and taking corrective measures on time. 

The beauty of the cash flow statement is that it provides a preference of the Company’s decision for in/outflow of the cash. It provides the user a complete picture that how cash is flowing in and out of the Company. Let us have a glance at the process of preparation of cash flow statement, monitoring of cash, planning of the cash, and the business objective behind the preparation of the cash flow statement. 

Preparation of cash flow statement 

There are three sets of activities in the cash flow statement. This set of activities include operating activities, investing activities, and financing activities. The operating activities can be calculated by two methods that include direct and indirect methods.  

The direct method only considers cash received and paid during the period under consideration. It does not need to adjust non-cash items as there is not much accounting involved.  

An indirect method starts with the net profit and adjustments are made considering an increase or decrease in the liabilities/assets. It takes into account the differences of the opening and closing balances in the balance sheet and adjustments of the non-cash items. 

Items on your balance sheet that are categorized as investments and or capital expenditure (fixed assets) are included under cash flow from investing activities. 

Financing activities includes the means by which you bring capital to your business. It could be fund invested by the owner, shareholders, banks, or public in general.  

Monitoring of the cash   

The cash flow statement provides a comprehensive summary for in/outflow of the cash for the business. By looking at the cash flow statement, the user can easily track why they have a shortage of cash within the business and gives them a direction to control the flow. For instance, If excess cash is flowing out from the financing activities, it might be controlled by the restructuring of liabilities or some request to defer the payments, if excess cash is flowing out of the investing activities, the Company might be purchasing more fixed assets and it may be deferred for some time to ensure better cash management.  

Planning of the cash 

The cash flow statement provides a great help in the planning of funds management. It helps to map the mind of the planner that how cash flow should look like considering the preferences of the Company. Even, planning can be carried out at category level that how much cash in-flow is expected from any specific activity or vice versa. Two major aspects to looked into that you do not want your existing business to have liquidity constrains and at the same time you are financing your growth your expansion. 

 Further, It can be clearly seen with the statement that how cash is flowing and can easily be compared with how it should be flowing/planned.  

Business objective 

The business objective of the cash flow statement is to manage the cash and to monitor the liquidity of the business. Often, we listen to people saying that we have an excellent profit but still facing problems in making payments for the salaries. That’s all due to a lack of cash management capability of the business and skills to understand the mechanics of the cash flow. 

The recent research from US bank finds the fact that 82% of the businesses fail due to poor management of the cash. Hence, a successful run of the business must monitor the cash flow with the same spirit as for the last figures if the profit n loss.