Cash Flow Statement

The cash flow statement is a financial document illustrating how money moves into, through and out of a business. It shows how much cash the company has on hand to pay its financial obligations and how much it keeps in reserves.

Lenders and investors use the cash flow statement formula and the resulting document to determine a company’s financial risk. After all, a business that struggles to keep cash in hand is more likely to have a tough time paying its bills, even if it has assets that inflate its worth.

How To Use a Cash Flow Statement

How entities use an accounting cash flow statement depends on their purpose. For example, a lender would focus on different cash flow data than a collections officer that works for the company.

Identify Trends

A company’s finance department can complete a cash flow statement analysis to identify trends. These variations in cash flow make it easier for the company to plan for cash-heavy operations, such as renovations, system upgrades or expansions.

Judge Company Performance

Business owners and their finance teams have ways of presenting the data so the company looks good. The cash flow is the most difficult document to enhance, so investors and lenders use it to judge performance and money management.

Cash Flow Forecasting

During volatile times, companies may have nothing more than predictions to hold on to. These show how the company tends to perform at a future date, which can help determine what recovery might look like and whether it’s possible at all.

What Is the Structure of the Cash Flow Statement?

When creating a cash flow statement, there are three main components. Most accountants organize them in the order used below.

1. Operating Activities

These have the greatest influence and create the biggest variations in cash flow over time. They refer to the everyday transactions that generate income or creates expenses:

Commissions
Lawsuits or fines
Monthly payroll
Product sales
Royalties
Service payments

2. Investing Activities

These refer to cash spent on long-term assets or the gains and losses from investments. It also includes revenue generated from selling long-term assets. An example of long-term assets might include cargo vans at a plumbing company.

3. Financing Activities

These are activities that change the worth of the business and its debt load. Examples of activities include dividend payments or buying back shares. As a result, this section is useful for investors who want to see how much of the company’s cash might end up back in their pockets.

Example of a Cash Flow Statement

The cash flow statement format can vary greatly in detail and complexity. Some documents can take up several pages, while others can summarize all necessary information in a few lines. Below is a simplified version:

Shadow’s Ice Cream
Statement of Cash Flows
Year Ending December 31, 2021

Cash Flow – Operations	2,000,000
Cash Flow – Investing	(500,000)
Cash Flow – Financing	(10,000)
Net Cash Changes	1,490,000
Cash at the Beginning of the Year	750,000
Cash at the End of the Year	2,240,000

How Accounting Methods Affect Cash Flow Management

Companies use either accrual or cash accounting methods to manage their finances. Most publicly traded corporations use the accrual method.

With the accrual accounting method, the company acknowledges the expectation of income or expenses, even if the actual transaction has not yet taken place. For example, it may record revenue from a client owing $200,000, even though the client has not yet paid. Consequently, their income statements do not align with their cash flow statements.

In contrast, smaller companies tend to use cash accounting. In this method, companies recognize and record transactions only when the actual transaction takes place. Because of this, the income statement more accurately reflects the cash position of the company. Even so, the cash flow statement formats the information in a way that is much easier to understand for cash flow management purposes.

How Gaviti Can Assist With Cash Flow Management

Managing liquid assets is one of the toughest challenges shared by companies of all sizes. One of the most crucial components is ensuring the accounts receivables team collects all invoices or debts in a timely manner. Gaviti helps companies supercharge their collections efforts.

Schedule a demo to find out how.