Many business owners disregard the importance of cash flow statements because they unwittingly believe that their current financial standing can be construed from other financial reports and projections. Unfortunately, however, a cash flow statement is necessary to adequately assess the incoming and outgoing flow of cash and other resources in a business.
Not only will a business owner with a cash flow system be more aware of his or her financial standing, but it will also help investors to make educated decisions on future investments. A business with regular and reliable cash flow statements shows more economic solvency, and is more attractive to investors.
A cash flow statement documents the incoming and outgoing cash in plain terms. Future sales and sales made for credit (unless they have been paid off) are not included in the cash flow statement, and most of the data will come from core operations. Payables and receivables should be expressly defined, as should depreciation of product value and inventory that has not yet been moved.
This will allow a business owner to compare past periods with the current financial standing and determine whether your receivables have increased or decreased.
This can also help to track your investments next to your receivables and payables. Are your investments increasing or decreasing in value? And has your inventory moved at a steady pace? New or expanding businesses can expect to see a decrease in cash flow, but this doesn’t mean that the business is going under. More stables businesses should see a steadily increase in cash flow over a period of several months or years.
There are typically five different sections in a cash flow statement, though large businesses might have more complex cash flow systems as required.
1. Beginning Cash Balance – This is the amount of cash that the business has in its possession prior to the start of a cash flow statement period. Owed balances should not be considered here.
2. Projected Cash Sources – This includes any sources of income that will play a part in your cash flow, such as investments and royalties.
3. Projected Cash Uses – This is the amount of cash that the business expects to pay out over the cash flow period, including all costs of operation.
4. Projected Net Change – This is the Projected Cash Uses subtracted from the Beginning Cash Balance, which will give you the net change. (This number may be negative, in which case it should be indicated as a deficit).
5. Ending Cash Balance – This is the Projected Net Change added to the Beginning Cash Balance.
You can create a cash flow system for your statements using a normal spreadsheet software such as Microsoft Excel. However, larger businesses may require a sophisticated cash flow statement software that can adequately manage the amount of data inputted every month. Microsoft Dynamics has several financial software options, as does Centage.
Reference:
- Microsoft DynamicsCentage Financial Resources
