A large part of running your own company is understanding the cash flow at all times. The most effective way to manage your cash flow and understand your company’s financial health during a specific period (or at any given time) is to have an accurate cash flow statement. What is a cash flow statement? Below you will find the ins and outs of a cash flow statement and how you can put it to good use at your company.

What Is a Cash Flow Statement?

Cash Flow vs. Income Statement

The financial aspects of owning a company require a lot of documentation in order to have the most accurate and up-to-date information about your company’s bottom line. Two of these types of financial documents include a cash flow statement and an income statement. At first glance, these may look and sound similar. However, both statements are necessary to effectively conduct your company.

A cash flow statement is a financial statement that summarizes the amount of cash (and cash equivalents) going in and out of your company. It measures the performance of your cash flow over a specific period of time. Unlike a cash flow statement, an income statement includes information such as depreciation expenses. Companies can choose from a number of deprecation calculation methods that modify the expense on the income statement. However, a cash flow statement is strictly a measure of the actual cash that flows in and out of the company. The major benefit of a cash flow statement is that it provides business owners with information on how well the company generates cash.

The Value of a Cash Flow Statement

A cash flow statement calculates how effective a company is in generating cash. It is an integral part of financial accounting and is one of three important accounting documents that can help inform you of your company’s financial status. The cash flow statement, income statement, and balance sheet help in understanding your company’s financial health. A cash flow statement includes three categories of financial data, including operating activities, investing activities, and financing activities.

• Operating Activities: Operating activities include cash that comes from your products or services. These include receipts from sales, interest payments, income tax payments, payments to suppliers, salaries and wages, rent payments, and other operating expenses. Operating activities include both revenue and expenses.
• Investing Activities: Investing activities include uses of cash from your company’s investments. This includes things such as the sale or purchase of an asset. Investing activities include using cash from your company, but not debt.
• Financing Activities: Financing activities detail the sources of cash and the amount paid to your shareholders. This includes cash from investors, banks, payment of dividends, stock repurchases, and debt repayment.

Methods of Calculating A Cash Flow Statement

The cash flow statement is created using one of two methods, the direct or indirect method. Both have their unique benefits, so finding which is right for your company is integral in gaining value from the statement.

• Direct Method: The direct method is used mainly by small businesses that use the cash basis accounting method. The cash basis accounting method calculates revenues and expenses when the cash is received or paid. The other method used is the accrual accounting method which calculates cash received or paid at the time the revenue is earned or expense is incurred regardless of when the actual cash is received or paid. The direct method of calculating a cash flow statement simply adds up all of the cash received and paid out during the reporting period. However, it is seen as more complex than the indirect method as it requires listing every cash disbursement, which can be time consuming. 
• Indirect Method: The indirect method is used by most companies due to its simplicity. Most companies use this method as they use the accrual basis accounting method and not the cash basis accounting method (described above). The cash flow statement using the indirect method starts with the net income (or loss). Then, additions or deductions from that net income (or loss) amount for non-cash revenue and expenses. The indirect method attempts to illustrate the cash coming in and out during a given period as it can depict a more accurate picture of your company’s cash flow. 

Indevia Accounting

Cash flow statements and other financial statements are integral to your company’s financial health. Hiring a professional accountant can help your company get to the next level. The new year just started so it’s a great time to get started. Contact Indevia Accounting for all of your company’s online bookkeeping services and needs. They offer a wide variety of services and have helped countless companies organize their finances and increase their bottom line!