Cash Flow Statement — The underrated financial report
Have you ever wondered why you need the Cash Flow Statement? Isn’t the income statement and the balance sheet sufficient to tell you what’s going on in my company?
If like most business owners, you are only looking at your balance sheet and income statements, and not paying attention to the cash flow statement, then it is strongly advised to read on, so you have one more tool to understand your business’s financial health.
How is it different from an income statement?
Both income and cash flow statements help to analyze the overall performance and financial health of a company over a specific period.
The Net Income found in Income Statement deals with both cash and non-cash transaction like depreciation expenses and deferred income tax.
Cash Flow Statement, on the other hand, only records actual cash that goes out and in your business. This gives a truer, more realistic account of your current financial health. This also explains why many investors prefer to look at Cash Flow Statement and ask some rather uncomfortable questions around it :)
What is in a Cash Flow Statement?
The Cash Flow Statement comprises of 3 sections:
1/ Cash Flow from Operating Activities (CFO): This is unmistakably the most important part of the statement, showing how much cash generated from regular operations such as sales and purchases of goods and services, salary, and interest payments. Higher CFO signifies a growing business
2/ Cash Flow from Investment Activities (CFI): Refer to cash invested in buying long-term assets to maintain and grow the business.
CFI is usually negative, meaning the company is purchasing more assets to grow its business, but it can also be positive if the company sells its long-term assets.
3/ Cash Flow from Financing Activities (CFF): A positive CFF signifies the company is raising money via Equity Financing (stock) or Debt Financing (taking a loan). At the same time, a negative figure implies the company is paying off its creditors or shareholders.
The Net amount from 3 sections will give you the net change in cash in the given period.
You might also hear about Free Cash Flow (FCF), which represents the cash a company have left after covering its operating expenses and capital expenditures (purchases of long-term assets)
Still not convinced a Cash Flow Statement is necessary?
Take an example of two companies with the same Net income and Balance Sheet.
To understand the difference between the two, let's take a closer look at their cash flow statements.
Al’s ice cream generated a considerable amount of CFO, enough to cover its investing activities and even returned money to its shareholders and creditors.
Jetty’s ice cream, on the other hand, generated lower CFO, spending more money than what it made. The shortfall in cash seemed to be financed by debt that can be seen in financing activities section.
As you can see, the Cash Flow Statement gives you insights into a company’s earnings quality.
Automation of Cash Flow Statement with Deskera Books
While financial statements, in general, are all time consuming to prepare, the Cash Flows Statement is still the most challenging as it requires processing data from various sources.
At Deskera, we realized the importance of having an automated Cash Flow Report, so we have built a ready-to-use Cash Flow Statement.
If you need some tweaks in the report, we got your back. You can always modify the statement using our easy and intuitive configuration window to suit your needs.
We hope this will help you save your precious time and effort, and give more detailed insight into your company’s financial health and well being.
Visit our website and experience how we made accounting simple with Deskera Books
