cash flow statement

A Complete Guide to Understanding Cash Flow Statement

When you are associated with a business that is small or midsize as an owner, you must have an idea that the prominent and imperative financial statement is the cash flow statement. We can not deny the challenging struggle that every midsize to small business has to go through for this financial statement. There are several examples of how a business can fail when there is a tendency to go out of cash. However, this makes it an integral part to have a good understanding of the cash flow statement because this will help the business owners to manage the struggle of cash flow and plan future business decisions efficiently.

There are three financial statements that are considered to be primary and the cash flow statement is one of them. The financial health of a company depends a lot on this. In the case of the owners who are carrying out small businesses, they are more associated with the income statement. It helps them with expenses and revenues. This will help them to manage several factors like equity, liability, assets, and balance sheets. On the other hand, the cash flow statement helps to have a clear understanding of business cash flow. Further in the discussion of this guide, you will gather information about what is cash flow statement, how to use and interpret it.


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What is a Cash Flow Statement?

The cash flow statement refers to a financial statement that helps to maintain a record of the business cash that is generated and spent in a certain period of time. There are generally some segments of a financial statement and the same is the case with the cash flow statement. These segments are known as investing activities, financing activities, and operating activities.

Have you heard or wondered what is the net cash flow and how is it calculated? The net cash flow is known to be a summation of investing, financing, and operating cash flows. In short, all the cash flow segments are added together to get net cash flow.


How to Use a Cash Flow Statement?

It is imperative to bring balance between your cash flow statement and income statement. For this purpose, your business will require a balance sheet. Further in the process, the summation of the income statement and the balance sheet will work as a cash flow statement.  There are a few steps that are important for the use of a financial statement. The detail is explained below with the listed steps.


1- Do the Calculation of the Net Income

You can take the help of the income statement, to generate the net income. The cash outflows and inflows of a company are defined by the income statement. On the other hand, the balance sheet helps how business transactions can affect accounts. This involves the discussion of accounts receivable and accounts payable as well as the inventory.


2- Conversion of the Net Income to the Net Cash Flow

The income statement of a business depends a lot on the accrual accounts. This process of conversion will help your business to make certain adjustments in the management of the net cash flow and net income. The incoming and outgoing cash in a business has a difference which is defined by the net cash flow. The period of this cash activity has to be specified as well.


3- Determination of Net Cash Flow – Financing and Investing Activities

Once the net cash flow is determined from the operations, the focus is to make the calculations of net cash flow from financing and investing as well. For this purpose, you will have to subtract the outflows of business and add the inflows of your business. Once this process is done, you will have to make a calculation by adding all the net cash flows. This will help you to clearly see the decrease or increase related to the cash flows, within the time limit of a specific duration.


How Can I Calculate a Cash Flow Statement?

When you aim to calculate a financial statement, generally there are two ways that are common. This includes the indirect method and the direct method which are explained below:


1- Indirect Method

The accrual basis of accounting has to do a lot with this indirect method of calculating the cash flow statement. In this method, accountants tend to make a record of business expenses and revenues according to the time of receiving as well as paying. Due to the simplicity of this method, this is preferred by several businesses.


2- Direct Method

In this method, the information is sourced from the business operations. The operating activities of a business are considered to make cash flow calculations. The cash outflows of business operations are taken away by subtracting them. This method is less popular among some business owners because it requires more organised details. This is most suitable where the accounting is cash-based but not accrual based.


The Bottom Line

Now that you have gathered a fair amount of information about the cash flow statement, we can say that it is imperative to have a clear understanding of financial statements to review the financial health of your business as well as take business decisions in the future. The cash flow statement is a little complicated to read and calculate, however, it is equally integral for the growth of your business. We hope these few minutes of reading have helped to develop a better understanding and you will be able to manage your financial statements more professionally and efficiently in the future.


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Disclaimer: The information about the cash flow statement provided in this article includes text and graphics in general. It does not intend to disregard any of the professional advice.

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