Cash is King! Cash is very important in the overall financial health of a business. Hence, if you can manage your business' cash flow well, you can be like a king too. The tool to manage your cash is the cash flow statement.
What is a Cash Flow Statement?
A cash flow statement summarises cash trasanction of a business accross an accounting period. It illustrates where and how your cash is flowing in and out of the company and only includes cash and cash equivalents records. Transactions that does not involve cash transaction will not be included, but may be reported in footnotes.
Unlike the profit and loss statement, cash flow statement shows the actual cash position of a company. For example, a company construction company may have obtained a contract and this is recorded as a revenue in the company's profit and loss statement; but the company may not receive the cash yet - which means, the company may not have as much cash in hand as reported in the profit and loss statement. Therefore, the cash flow statement is used to show all transaction involving cash in a company.
Business owners, managers and investors use this statement to determine the company's short term financial ability and liquidity. This includes company's ability to pay employee's salary, bills and other immediate expenses. A profitable company may fail to manage their cash flow adequately.
In most public companies, profit and loss statement will be used in their annual report instead of the cash flow statement.
Ways to show your cash flow
There are two ways to present your cash flow statement, either direct or indirect.
- Direct: Cash flow statement will be recorded directly from receipts to customers or payments to suppliers, employers, interest and income tax.
- Indirect: Cash flow statement will be calculated indirectly from net profit deducting or adding non-cash revenuew and expenses. Many companies will prefer to use this method as less information are required.
Categorizing your cash flow
There are three types of activities that you can classify cash flows in business: Operating, investing and financing.
- Cash flows from operation: refers to cash flows that is related to sales or production of a company's merchandise, such as advertising, marketing and shipping costs, purchase of materials, accounts receivable and etc.
- Cash flows from investing: refers to cash flows from investing activities, which includes purchase or sales of a property, equipment and plant.
- Cash flows from financing: refers to cash used in business finances, such as amount of dividends paid out or share buybacks, cash obtained from capital fundraising effort, equity or debt and etc.
Cash Flow Statement in TreezSoft
TreezSoft cloud accounting helps you keep on top of your company's financial reporting by series of automated processes and integration between systems.
You can easily generate a cash flow statement by just a few clicks in TreezSoft. Our system will automatically calculate and summarize all information needed according to your options (e.g. targetted date).
TreezSoft is a cloud accounting software, it allows you to access your financial information anytime, anywhere. It also allows you to create unlimited users for FREE for your account in TreezSoft.
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