A cash flow statement is an important financial document that provides insight into the cash inflow and outflows of an individual or an organisation. It is an essential tool to understand the financial health of a business to make informed decisions and to make future plans. In this short blog, we will walk through the steps to prepare a cash flow statement.
Understanding the Basics:
The basic concepts of a cash flow statement are:
- Cash inflows: These are sources of cash that include operating activities like sales revenue, financing activities like cash flow loan, and investing activities like selling assets.
- Cash Outflows: These are uses of cash and include operating expenses, taxes, interest payments or any other business expenses.
Step-by-step Preparation :
- Choose a Reporting Period: The first and foremost step will be to select a specific time period for which you want to prepare the cash flow statement. It can either be monthly, quarterly, or yearly depending on your requirements.
- Gather Financial Statements: Collect the relevant financial statements for the chosen periodlike;
- Income Statement: It summarises the revenues, expenses, and profits or losses.
- Balance Sheet:It provides an overview of the assets, liabilities, and equity as of a specific date
- Determine Cash Flow Categories:Cash flows are typicallydivided into three main sections.
- Operating Activities:Cash inflows and outflows related to the core business operations, including receipts from customers and payments to suppliers, employees, and other operating expenses.
- Investing Activities:Involves cash flows related to the acquisition and disposal of long-termassets like property, equipment, and investments.
- Financing Activities:Includes cash flows related to raising capitaland repaying debts, such as issuing or repurchasing stock and borrowing or repaying loans.
- Calculate Operating Activities:
- Start with the net income from the income statement.
- Adjust for non-cash items such as depreciation and amortization.
- Add back decreases in current assets like accounts receivable and increases in current liabilities like accounts payable.
- Deduct increases in current assets and add decreases in current liabilities.
- The final figure will be the net cash provided or used by operating activities
- Determine Investing Activities:List the cash flows related to investing activities like purchase or sale of assets: They could include:
- Purchase or sale of property, vehicles, and equipment.
- Investments in stocks, bonds,or other securities.
- Loans to other entities.
- Calculating Financing Activities:List the cash flows related to financing activities, which involve changes in liabilities and equity such as;
- Borrowingor repayment of loans.
- Issuing or repurchasing of company stocks.
- Paying dividends to shareholders.
- Summarise Cash Flows: Add the net cash flows from each category including operating, investing, and financing to determine the net increase or decrease for the reporting period.
- Reconcile Cash and Equivalents: Include the initial cash balance, combine it with the net cash inflow or outflow, and conclude with the final cash balance for the given period.
By following the step-by-step guide outlined above, you can create accurate and insightful cash flow statements to aid in your financial management endeavours.
A cash flow statement gives valuable insights into the financial health of the organisation. Arriving at the ending cash balance isn’t merely a mathematical exercise. It’s a holistic representation of the organisation’s financial prowess, distilled from the intricacies of daily operations, strategic investments, and financial decisions. This balance provides a clear picture ofthe organisation’s ability to face uncertainties, seize opportunities, and fulfill obligations.It serves as an invaluable tool for making informed decisions, future planning and ensuring the financial stability of an individual or an organisation.
If you require further assistance or have additional queries, please do not hesitate to reach out to us www.knote.com.au. Knote’s founders have over 30 years of combined finance and business experience and understand how important finance and business cash flow are for business. We are here to provide guidance and support to ensure that your journey through the intricacies of financial management is smooth and successful.
