Understanding Cash Flow Statements in Bookkeeping

Understanding the cash flow statement


Table of Contents

Table of Contents

Companies can create hundreds, if not thousands, of monthly transactions, which can overwhelm many owners and investors when they look at the ledgers. As a result, accountants have created high-level statements that report on the company’s activities and allow managers to make decisions based on these reports. One of the most significant is the cash flow statement.

What Is A Cash Flow Statement?

A cash flow statement is a financial document that provides a detailed overview of the cash inflows and outflows of a business over a specific period. It serves as a snapshot of how money moves in and out of a company, helping stakeholders understand the liquidity and overall financial health of the business. Unlike the income statement, which focuses on revenues and expenses, the cash flow statement centers on actual cash transactions, making it a vital tool for assessing a company’s ability to meet its short-term financial obligations.

What Is Included in a Cash Flow Statement?

A cash flow statement is typically divided into three main sections:

  • Operating Activities: This section captures the cash generated from the primary business operations. It includes receipts from customers, payments to suppliers, salaries, and other day-to-day transactional activities.
  • Investing Activities: Here, you’ll find details about cash flows from the acquisition and disposition of long-term assets, such as machinery, buildings, or investments in other businesses.
  • Financing Activities: This section provides insights into cash flows from and to external sources, like lenders and shareholders. It includes activities like borrowing funds, repaying loans, issuing or buying back stock, and paying dividends.

What goes in a cash flow statement?

How To Calculate Bookkeeping Cash Flows

There are two methods for calculating net cash flow from operating activities: direct and indirect.

The direct method ignores all non-cash activities and includes determining as well as netting your cash receipts and disbursements. If you use the cash basis of accounting or have just a couple of cash transactions, the direct method may be an appropriate choice for you.

However, whether you use the accrual basis of accounting or have an ongoing number of cash transactions, the direct technique is frequently too time-consuming. In such cases, the indirect method is usually preferable.

The indirect technique involves subtracting your net income from the income statement and adjusting it to calculate your net operating cash flow. For example, that may require cutting off earned but uncollected revenues, adding non-cash expenses like depreciation, and reversing the effect of any gains or losses.

What Is Positive and Negative Bookkeeping Cash Flows?

Positive Cash Flow

A positive net cash flow shows that your company is in good shape. It implies that you are making more revenue than you are spending, or that you are generating enough cash through your finance and investment activities to pay your debts. This is necessary for maintaining your firm, scaling it, and repaying creditors or investors.

The longer you keep a positive cash flow, the larger your cash reserves will grow. Eventually, you should use your extra earnings to improve your firm. For example, this could imply purchasing new equipment, expanding your sales force, or investing in income-generating assets.

Negative Cash Flow

A negative net cash flow shows that your company is spending more money than it is earning. Because running out of money is one of the main reasons for business failure, you should keep a tight eye on your reserves during periods of negative cash flow. If they fall too low, you may need to cut back on your spending or seek financing.

However, a negative cash flow does not always indicate that your firm is failing. For example, a corporation may have negative net cash flows in the months preceding its opening. There are many expenses without significant revenue during this time.

Cash Flow Statement And Loans

Lenders often look at the cash flow statement when determining whether or not a business qualifies for a loan. Healthy cash flows can assure a lender that the company is making strategic spending decisions, reducing the perceived risk of lending to them.

Creating your cash flow statements may become challenging as your company matures. Once you’ve grown sufficiently, consider hiring a bookkeeper and consulting with a Certified Public Accountant. That will ensure your financial statements are accurate and help you get the financing you need to continue growing your business.

How do lenders use your cash flow statement?

The bottom line

The Cash Flow Statement is an essential tool for business owners, highlighting the company’s financial health through its cash inflows and outflows. It not only reflects the business’s current financial status but also influences lenders’ decisions when seeking loans. As a business grows, creating these statements becomes more complex, requiring expert accounting guidance. In short, a well-managed cash flow statement is key to ensuring business sustainability and success.

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Is a negative cash flow always a bad sign for a business?

Negative cash flow alone is not necessarily bad, especially for growing businesses. But sustained negative cash flow over long periods is usually a red flag signaling losses and a need for change.

Cash flow can turn negative due to investments or seasonal cycles, which may be normal. Startups often expect initial negative cash flow, but need a plan to reverse it quickly. The implications depend on the context and length of negative cash flow.

How can the Cash Flow Statement help with all the transactions?

The Cash Flow Statement offers a comprehensive view of your business’s financial activities by:

  • Categorizes operating, investing and financing transactions.
  • Tracks total cash inflows and outflows over time.
  • Assesses liquidity and ability to meet obligations.
  • Evaluates if growth is sustainable from cash generated.
  • Gauges working capital and operational efficiency.
  • Identifies underlying issues early.
  • Informs forecasts and projections of future cash flow.

As my business grows, should I consider professional help for creating cash flow statements?

Yes, as businesses expand, the process of creating cash flow statements can become more complex. It’s advisable to consult with a CPA or hire a bookkeeper to ensure accuracy and comprehensiveness.


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