What is the Cash Flow Statement & How to Read it?

Cash Flow Statement

If you are always confused about the uses of a cash flow statement, the numbers, and figures present in it, and how to read this financial document, then you have come to the right place. With the help of this article, we will explain everything that you should know about the statement using the example of a cash flow statement and more. 

Financial Statements are the core of any organization that not only depicts its financial and economical situation but also allow the business to find out the areas of improvement. With the help of the financial statement, the business can ascertain the KPIs of the business as well as its loopholes. The business and its personnel can work on improving the KPIs and fixing the loopholes for the benefit of the organization. Apart from this, these statements also show the overall change seen by a business in different periods. 

Furthermore, cash plays a vital role in the development and smooth functioning of the business. If you have adequate cash in hand, then you can be ready for any uncertainty that comes your way. Hence, even if some unforeseen expense reveals itself in the due course of business, you can use the in-hand cash and allow your business’s operations to run uninterruptedly. The recording and management of this cash present with the business is the responsibility of a cash flow statement. 

With the help of a statement of cash flow, you can ascertain how much cash or funds a business has in hand at any point in time. However, this is only one of the uses of a cash flow statement. Apart from this, the other uses include fund management, cash recording, etc. 

Sometimes, it becomes tough for normal Joes and even professionals to ascertain the required information from the cash flow statement. This is because the statement can be quite complicated at times. However, we can make it easy for you to understand the statement and its related attributes. All you need to do is have a look at all the sections of this simple guide closely. Once the sections are covered, you will get all the information required to understand the statement. So, let’s initiate by understanding what is a cash flow statement in detail and then proceed further. 

What is the Cash Flow Statement? 

Just like the name of the document, this treatment is concerned with the flow of cash in an organization. The statement shows the cash incomings and outgoings from the business. Additionally, with the help of this statement, you can also determine the amount of cash your business had initially and how much it has presently. The statement can be created for any duration of time but is generally prepared for a month, quarter, half-year, annual, or more/less. Even the sources of cash receipts and payments are shown in the statement. 

Conceptually, if you pick an example of a cash flow statement, you will find it to be divide into three parts or activities: 

  1. Operating Activities- cash inflow and outflow related to the transactions for any business operation
  2. Financing Activities- cash inflow and outflow related to the transactions for any financial activity in the business 
  3. Investing Activities- cash inflow and outflow related to the transactions for investing and investment purposes 

When you sum up the amount from these activities, the figure you will get is called the net cash increase for the reporting period. This data represents whether your business has gained more money or spent excessively during a tenure. Finally, at the end of the statement, you will get the cash available with the business on a specific date or at the end of the specified tenure. This figure should match the total amount that represents the money present in the bank account as well as the company’s cash. 

What are the Uses of a Cash Flow Statement? 

It’s quite crucial to ascertain the status of your business. A smart business should always know whether its operations are taking the organization further or not. You should have an idea about the growth or downfall of the business so that better and require decisions can be make for its betterment. 

As a cash flow statement shows where the business stands, cash-wise, and the expenditure patterns, company executives can determine whether the cash expenditures are helpful for the organization or not and modify the same if required. Apart from this, the business can easily ascertain whether the cash expenditure was beneficial or not. 

One of the major concerns of business at times is exhausting the money too quickly. This situation is even more common with startups than with well-established businesses. Such startups may suffer a lot if the cash is spend too quickly. If the business finds any specific spending pattern that is harmful to the cash reserves, then the respective personnel can create new strategies or revise the plans for better cash management. 

This will help you retain more cash for profitable tasks. 

Another one of the most crucial uses of a cash flow statement is to show the public, investors, and other parties related to the business its strength. If the cash in hand is sufficient, these parties show trust in the organization and proceed to work with it. If you are getting payments upfront rather than waiting for collections, the investors will also be motivate to invest. 

How to Read a Cash Flow Statement? 

Once you get a hold of what different sections of the cash flow statement determine, you can easily read and understand it. As stated previously, the statement is divided into three sessions viz the operating activities, financial activities, and investing activities. These sections may vary according to the nature and operations of the business. For example, a business’s statement of cash flow may not have an investing section because it did not invest in anything during its tenure. 

However, the operating activities section is always present as the business can not work without operations. Hence, this section is also one of the most crucial ones for all businesses. Let’s understand these sections of the statement using a sample cash flow statement. 

1. Operating Activities: 

Just like the name of the category, the operating activities section is related to the operations of the business. This section shows all the receipts gained and expenditures executed for the smooth operation of the business. Hence, the revenue from the sales derive during the tenure is also record in this section. This section comes at the top of the statement as well. 

Generally, the net income is record as the first thing under the section. This number is collect from the income statement of the business. Then appears the Adjustments to reconcile your net income to net cash. This sub-category defines all the figures that are yet to be reflect in your bank account. The company may pay or receive these payments or receipts in due time, it’s necessary to include them to get a better and more reliable result from the cash flow statement. 

When you adjust the amount from Adjustments to reconcile your net income to net cash with the net income, the figure you get is the net cash provided by operating activities. 

2. Investing Activities: 

Next are the investing activities related to the business. This is the section that records the capital expenditure borne by a business. Why is this data important? When the investors see the investments you made in the organization and its effect on the business. They ascertain the success of the decision and then decide whether to invest further or not accordingly.

The thing to remember is that this investment is done by your company and not in your company. These investing activities generally include the amount gained from or spent on assets, securities of other companies, mergers and acquisitions, sales from subsidiary companies, and various others. 

When you adjust the proceedings and payments under this category, you get the net cash flows from investing activities. Now let’s proceed to the last section to understand the uses of a cash flow statement properly. 

3. Financing Activities:

The last section of a cash flow statement shows the financing activities. This section records the cash outflow and inflow to and from the debts, capital, and fund management. Under this section, the cash receipts and payments related to debts, loans, sale or purchase of equity, dividend payments, etc. 

Once you adjust the payments under this category, you get the data of net cash flows from financing activities. 

Why is this data important? Considering the point of view of the investors, this data allows them to ascertain the overall health of the organization. Additionally, a smart investor can easily find out whether the financial model followed by the company is profitable and sustainable just by understanding the facts within this section. 

What are the Uses of a Cash Flow Statement Paired with Other Financial Statements? 

There are a plethora of uses for a cash flow statement. We have explained all the major ones out of these uses previously. But did you know that a statement of cash flow can give an even transparent image of the organization. And its operations when paired or compared with the help of other financial documents? 

Yes, you can ascertain where the cash outflows are excessive. And where the inflow is lagging and then make an informed decision for the greater good of the business. When you put together the balance sheet and the statement of profit and loss with the cash flow statement. You can ascertain the actual operating performance of the business. Even if you get your hands on these statements of the competitor, you can use the same against the competitor and for the growth of your business. 

Additionally, when you take all these statements together a business can ensure that no transaction or data is left out. You can reduce the chances of a cash crunch and depict the true stand of the business. You can ascertain the actual position and condition of the accounts receivables and their sources. 

Summing Up: Everything About the Cash Flow Statement

Hence, we can easily conclude from the above sections that there are multiple uses for a cash flow statement. The statement is quite important for both startups and well-set-up businesses. If you want to know more about the statement of cash flow, then you can take the help of the experts at The Ledger Labs. Additionally, if your startup facing problems in creating or managing the cash flow statement, then you can seek Accounting Services for Startups. These smart personnel have years of experience in various industries. And can help you with everything even remotely related to financing and statement management. 

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