The Statement of Cash Flow can be understood as the financial records which reflect the business’s incomes and expenses to determine the net inflow or outflow of cash. This Statement of Cash Flow is divided into Operating, Investing and Financial Activities.
The Statement of Cash Flow helps business owners to understand how well their business has been handling cash to pay their debtors, fund their operating expenses and fund their investments. This statement also provides the business owners with an understanding of their financial grounding for their cash.
The statement of cash flows can be prepared by:
- Analyzing cash receipts and payments OR
- Evaluating statement of profit or loss and statement of financial position.
Information is usually collected on an accrual basis, but the statement of cash flows is prepared on a cash basis. The statement of cash flow can be prepared using a direct and indirect method.
- Direct Method – The direct method looks at the real cash inflows and outflows of the business as they occur, giving a realistic view on the nature of cash operations and where it’s being spent.
- Indirect Method – The indirect method looks at the cash flows by operating activities at net income and then makes changes in working capital and adjustments in non-cash transactions.
The Statement of Cash Flow is broken down into 3 main sections.
Operating Activities
Operating activities include cash flow which is used in running the business. This includes expenses such as wages, rent, interest payments and changes made to accounts receivable, accounts payable, dividends received, paid income taxes and depreciation.
Investing Activities
Investing activities include any cashflow processors which are required when investing in the long term progression of the company. These include loans made or received from customers, purchase or sale of assets and fixed assets such as property, equipment or plan and marketable securities.
Financing Activities
Financing activities include cash sourced from investors or banks and cash used to pay shareholders. These activities also include stock repurchases, loans, dividends to be paid and debt repayments.
Moskovitz (2022) explains that there are several ways to improve your business’s cash flow.
1. Lease Instead of Buying
Leasing supplies, equipment and real estate helps to pay off in small increments, which helps to maintain general cash flow and keep more cash for the day-to-day operations. Additionally, lease payments are considered a business expense which can therefore be written off on your taxes.
2. Offer Discounts for Early Payments
By offering a discount for your accounts receivable, it helps to encourage cash inflow earlier, allowing you to have more cash on hand.
3. Conduct Customer Credit Checks
Conducting a customer’s credit check before signing them up is very beneficial to weed out any accounts receivable who would become blockers in the long run in your business transactions.
4. Inventory Optimization
Doing an inventory check can help you to identify which stock sells well and which stock does not. By doing so, optimizing ad selling the best performing stock is helpful as stock which does not rotate frequently ties cash which can hurt a business’s cash flow.
5. Use High- Interest Savings Accounts
A passive method to improve cash flow is to save money in savings accounts with high interest to help yield better interest overtime. This helps to improve the liquidity of a company, improving their overall cash positioning.