Cash Flow Statements
If you are a business
owner, you need to know what a cash flow system is not only because it is
a mandatory potion of your financial report, but also because you can use
it to better manage your business solvency. A cash flow statement can help
you forecast future cash flow and budgets, and also give your investors a
clear picture of your company’s financial health.
A cash flow statement
documents the amount of incoming and outgoing cash (and its equivalents).
Only cash sales are recorded in a cash flow statement – all future sales
(including those made on credit) are not declared. The biggest bulk of
your cash flow is usually from your core operations. Document the movement
of your receivables and payables, inventory and depreciation.
Record the receivables from
an earlier accounting period and then compare it to the subsequent period.
If the receivables decrease, this means your business has more cash
because your clients have paid. If receivables increase, remember to
subtract the amount of increase from your net sales; because while they
are technically sales, they are not cash and have no bearing on your cash
flow statement.
The same standard applies
when you are computing for cash flow as it relates to inventory and
depreciation. If your inventory escalates, for example, this may mean you
spent more cash buying them. Record this movement in your cash flow
statement. If you paid for the new inventory in cash, subtract the value
from your net sales. If you bought the new inventory on credit, record the
movement as an account payable. If your company bought appreciating
investments (such as a new office), this is recorded as “cash in.”
If your cash flow statement
is negative (meaning your cash inflow is less than your outflow), don’t
panic. This does not automatically mean that your business is failing. A
negative cash flow is perfectly understandable if you are expanding and
therefore need to spend money on more equipment, wages, etc.
