Understanding Your Statement of Cash Flows
The statement of cash flows (also known as the cash flow statement) provides a comprehensive overview of how your business has generated and utilised cash (and cash equivalents) over a specific reporting period.
For each reporting category, cash inflows (receipts) and outflows (payments) are outlined, resulting in a net increase or decrease in cash for that category. The overall net change across all categories is then added to the opening cash balance at the start of the reporting period, giving the closing cash position at the end of the period.
This financial statement is essential to understanding your business’s cash movement and should be analysed alongside the Profit and Loss Statement and Balance Sheet. Together, these three reports provide a holistic view of your business’s financial health.
How Does It Work?
The statement of cash flows integrates data from the Profit and Loss Statement and the Balance Sheet to provide a clear picture of your current cash position.
While most financial statements are prepared on an accrual basis, the cash flow statement is reported on a cash basis. Accrual income (from the Profit and Loss Statement) is converted to cash by analysing changes in the balances of asset and liability accounts.
Report Categories
The statement of cash flows is divided into three key sections, each representing a different type of business activity:
1. Operating Activities
This section includes cash flows related to business operations, such as income, expenses, assets, and liabilities (excluding those reported under investing or financing activities).
2. Investing Activities
This section covers cash flows related to the purchase or sale of long-term assets, such as investments, property, plant, and equipment. It also includes transactions like security deposits and dividends received.
3. Financing Activities
This section reflects changes in equity and debt, including issuing or repurchasing shares, bonds, or loans, as well as paying company dividends (if applicable).
Formal financial reports often include notes to the financial statements, providing additional details about significant items or activities that did not involve cash transactions. These notes may also elaborate on summarised categories, taxes, employee provisions, or related party transactions, offering further context and transparency.
Why Is It Useful?
The statement of cash flows is a vital tool for understanding your business’s financial performance and sustainability. It provides key insights into:
• Cash Position: How strong is your current cash flow?
• Business Viability: What is the long-term outlook for your business?
• Cash Flow Drivers: Which activities generate the most cash flow?
• Operational Efficiency: What is the relationship between net income and operating activities?
Unlike the Profit and Loss Statement and Balance Sheet, which provide snapshots of account values at specific points in time, the statement of cash flows highlights changes and trends in your financial position over time. This makes it indispensable for evaluating your ability to meet financial obligations and fund operations.
If you would like to delve deeper into your financial statements, cash position, or future outlook, arrange an advisory session today.
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