Are you wondering: what do cash flow statements show and do you need them for your business? We’ll be covering all of these questions in this guide, along with resources that can help you create and manage your statements.
What Are Statements of Cash Flow?
Cash flow statements are one of the most important tools that your business can use to understand its financial health. Statements are reports of your cash flow that show you the following information:
· Cash flow into the business
· Cash flow out of the business
· Cash flow balance
Reports are created on a period basis, meaning that they may be for a week, month, or quarter – however long you would like. Cash flow statements are part of your overall financial statements.
Accounting teams and business owners often perform in-depth cash flow statement analysis because it shows the true health of the business.
How Can You Prepare a Cash Flow Statement?
Learning cash flow management is a task that is best left to an accounting team, but it’s also easy to learn. You’ll need to do the following to prepare your own basic statement:
1. Calculate your starting balance. The balance is how much cash or equivalents that you have to start the reporting period. For example, if you have a period of January – March, you will need the net cash flow on January 1st to start.
2. Calculate your cash flow from all of your operating activities. These will be all of the cash that came into the business and went out of the business based on operating activities.
3. Next, you’ll follow the same requirements as in step two, but this time, you’ll be doing it for all of your investing activities.
4. Now, you also need to do the same for all financing activities, and these will include debt, equity financing, dividends paid and more.
5. Use the three calculations to calculate your business’s total cash flow for the period.
Of course, you’ll need to gather all of your financial documents, including any receipts for payments and any proof of cash coming into the business. You will not be counting invoices that remain unpaid because they’re not contributing to your cash flow until the payment is actually made.
Presenting Information Using Direct and Indirect Methods
When you create a cash flow statement, you can use either direct or indirect methods for your cash flow.
What’s the difference between the two?
· Direct methods use all cash transactions while ignoring non-cash transactions..
· Indirect methods begin with your net income/loss and will adjust the profit and loss for non cash transactions.
Which method is best for your business?
There’s no harm in trying both methods and seeing which one you personally prefer for your business.
A Cash Flow Explanation Video
If you’re still confused about cash flow and need a visual representation of what cash flow statements are and how to create them, watch this helpful video that explains it in great detail:
Cash flow is something that every business in the world will examine to determine the financial health of their business. There’s no shortage of resources that can help you understand and master cash flow statements:
Creating cash flow statements manually is fine when you’re just starting your business and don’t have the finances to hire an accountant or pay for software to create them. But as your entity grows and you have more inflows and outflows to handle, you’ll want to consider utilizing apps or software for this process.
Now that you know how to do cash flow statements for your business, it’s crucial to either work with an accountant or use cash flow software to create your statements easier. The information provided in your statement is invaluable and can alert you to any serious issues with your business’s financial health.