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What You Should Know About Cash Flow Statement

cash flow statement

 


When operating and leading a business, having a clear understanding of how money is moving in and out of the company is essential to building and scalinging for the future. Without a proper knowledge of cash flow and cash flow statement, it can be difficult to plan for the future and find spots where resources are being allocated ineffectively.

 

The best way to collect and present the cash flow for a company in a given period of time is through a cash flow statement (CFS). This article will break down cash flow statements, what they include, and how you can prepare one quickly with the help of trained professionals.

 

 

cash flow statement


What Is A Cash Flow Statement?

A Statement of Cash Flows, also known as a cash flow statement(CFS), is one part of three financial documents that are generated by a company to present the financial analysis of a business. 

A CFS exists to give an overview of the liquidity of a company over a specific period – monthly, quarterly, or annually – and when combined with the budget balance sheet and profit/loss statement, can present an overall health and wellness report on a company.

Cash flow statements can help company leaders, investors, and tax professionals understand how viable a company is during a period, and look closer at places where money may be flowing improperly.

 

What Information Does A Cash Flow Statement Include?

A CFS will typically include three collections of data: Operating Activities, Investing Activities, and Financing Activities.

  • Operating Activities: Operating Activities are the main activities of a company that generate revenue. These do not include investing or financing.
  • Investing Activities: These activities include any cash movement that occurs due to acquisitions and disposals of a company’s long-term assets.
  • Financing Activities: Financing activities will include any cash flows that occur due to a change in the equity capital of the company – such as bonds, dividends, stocks, etc.

 

When taken together, all three of these sections on the cash flow statement will help give a fast overview of the ways that cash is moving through the company.

 

How To Prepare A Cash Flow Statement

In preparing a cash flow statement, there are two methods that a company can choose to take, known as the direct method and the indirect method. The cash flow statements will be nearly the same once prepared and serve the same purpose. The only difference will appear in the operating section of the CFS.

  • Direct Method: In a direct method, the major classes of gross cash payments and gross cash receipts are reported on the statement. Each unique instance of cash in or out is combined and shown in the total cash flow.
  • Indirect Method: The indirect method begins with net income and then adjusts the statement’s profit and loss by the impacts of transactions.

Regardless of the method chosen, the cash flow from the operating section will result in the same amount. The main difference is found in the presentation of the information.

 

Who Must Create A Cash Flow Statement?

Every company should create a CFS each year for taxes and reporting. Often, companies will choose to report on a more consistent basis to give a short-term look at cash flow changes over a specific period. 

 

While a company can build their own cash flow statement in-house, it is recommended that they work with a skilled professional to ensure the statement includes all necessary documentation and information to be effective.

 

Who Should See The Cash Flow Statement Of A Company?

As a larger part of a company’s overall financial health report, a CFS gives a detailed snapshot of a business’s profitability in the near and long term. For those who understand how to read and analyze a cash flow statement, these details can help determine whether or not a particular company can pay its expenses based on its liquidity.

 

There are generally three parties who may be interested in seeing a company’s cash flow statement:

  • Tax & Governmental Agencies: Tax agencies and the government will need to have the cash flow statement filed as part of the yearly tax processing of a business.
  • Company Leadership: Cash flow statements should be assessed by company leadership on a consistent basis, to better see how the company is performing and what steps need to be taken for health and viability.
  • Investors & Shareholders: Any individual or entity that has taken a financial stake in a company will want to see a CFS to determine how their ownership or investment dollars are being used by the company.

 

Develop An Accurate Cash Flow Statement With FastLane

As seen above, a CFS can be an incredibly useful tool for understanding the health and liquidity of a company or entity. This can give guidance to investors, stockholders, and business owners as to how they should navigate the future with confidence. 

 

Preparing a CFS is vital to success, and should be done in partnership with a trained and skilled accounting firm. At FastLane, our team of trained financial analysts can help your business bring together the necessary information to build a strong CFS. Our team will work with you to present all necessary information and activities into a professional document for analysis and tax reporting.

 

Contact FastLane today to learn more about how to prepare a cash flow statement, and talk to a member of our team to discover our full suite of professional business services.

 

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