Jul
19
2019

Understand the Cash Flow Statement

“Our Income Statement shows that we are profitable, but how come our company is always strapped for cash?” This is a common question I get from managers and business owners alike. And I always tell them that the Cash Flow Statement is one place to look for answers. This financial statement is one of the reports mostly overlooked especially by small business owners. Most of the time, they are not even aware that this financial statement is one of the basic reports they should be getting from their accountants.

The Cash Flow Statement shows the actual cash generated by the company for a given period. It is primarily composed of three main categories:

Funds generated from or used in operations
Investments made by the company
Financing transactions

Cash Flow from Operations

This category revolves around four activities:

Collections from customers
Payments to suppliers
Other operating cash outflows such as sales & marketing and administrative expenses and interest payments
Cash tax payments

A positive net cash flow from operations means that the company’s core business operations is able to sustain itself – the collections from customers are enough to cover the day-to-day needs of the business.

A negative net cash flow from operations means that the cash inflows from the company’s operations are not enough to cover the daily costs and expenses. This is quite expected for companies who have just recently started operations because efforts are still focused on sales and marketing to build customer base. But management should always work to improve the net cash flow from operations to assure investors that management is effective in controlling the financials and operations of the business.

Cash Flow from Investing Activities

This section usually shows the amount of cash spent by the company on capital expenditures, such as new factory equipment or business expansions. This section also includes other monetary investments (such as money market funds) and acquisitions of other businesses.

There is a negative net cash flow from financing activities if the company put money into investments during the period. It is good to see a company re-invest some of its profits back into the business to cover depreciation of its fixed assets and/or to finance business expansion.

Conversely, the net cash flow from financing activities is positive if the company liquidated or sold some or all of its investments. This may sometimes be required to generate funds to augment the operational requirements of the business. Liquidating investments is better compared to borrowing funds from the bank or other creditors because the company will not have to pay interests.

Cash Flow from Financing Activities

This section shows the outside financing activities undertaken by the company. The cash inflows from financing activities pertain to additional capital from investors or from borrowings from the bank or other creditors.

The cash outflows from financing activities, on the other hand, result from repayments of bank loans and other borrowings and/or cash dividend payments given to investors.

Effective Cash Management

A big part of running a business is managing the funds. You need to make sure that your company’s cash inflows are timely and enough to cover your cash outflows. Your company will be attractive to potential investors when they see that your over-all operations produce adequate free cash flow (FCF). Free cash flow shows that your company has the ability to pay debts, pay dividends and facilitate the growth of the business.

A regular analysis of the cash flow statement will enable you to determine the working capital required by your operations. You will also see if your operations are generating enough cash and if you have extra funds either to expand your business or in acquiring other investments. You will also be timely prompted if you need to get additional funds either from your investors or creditors.

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Jul
11
2019

Accountants Cash Flow Statements & Balance Sheets

A balance sheet is a quick depiction of the financial condition of a business organisation at a particular period in time. The actions of a commercial enterprise drop into two separate areas that are reported by an accountant.They are profit-making actions, which takes sales and expenditure. This can likewise be referred to as operative activity. There are likewise actions that demand generating finance from equity and debt sources, net profit distribution to stockholders and owners, asset investment and disposing and varying one-time investment and fiscal projects.

Profit giving actions are described in the income statement; financing and investment activity are observed in the statement of cashflows. Put differently, two different finance statements are processed for the two opposite cases of transactions. The one-year growth or reduction in cash from operating actions for the year is likewise qualified in the cashflow statement, while the income statement accounts the sum of occurrent profit.

The balance sheet is different from the income and cashflow statements that describe, as it states, income of hard cash and outward cash. The balance sheet shows the totals, or amounts, or a businesses assets, indebtednesses and directors equity at an moment in time. The word balance has several meanings at different times. As it’s utilised in the phrase balance sheet, it refers to the balance of the two opposite sides of a company, total assets on one face and total financial obligations on the other. A balance sheet can be reckoned at any established instance, but, in actual fact are by and large done at regular calender points such as every month, quarterly and invariably yearly, up to and including all transactions on the final day of the account period.

It would probably be idealistic if commercial enterprise and life were as painless as developing trade goods, trading them and registering the net profit. But, In actual fact there are often considerations that interrupt the cycle, and it is part of the accountants occupation to report these too. Modifications in the business situation, or price of commodities or whatever number of matters can lead to singular or extraordinary profits and losses in a business. Singular matters that can affect the income statement can take in curtailment or restructuring the company. This used to be a rare thing in the commercial enterprise environment, but is nowadays fairly common. Commonly it is instigated to cancel losses in different areas and to decrease the price of employees remunerations and advantages. Yet, there are costs attached with this also, such as severance remuneration, outsourcing functions, and early retirement costs.

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