A cash flow statement, abbreviated as CFS, is one of the main financial statements out of three (the other two being the income statement and balance sheet) to gauge a business’s financial strength. When the cash flow is strong, it signifies that a company is in a good position to expand the business. Also, the business has an open door for all opportunities and can also invest in new projects. These financial statements are helpful to show the constant inflow and outflow of cash.

Business entities must maintain a sufficient balance of cash at all times as this practice enables them to meet different types of needs and requirements of the business. However, the cash outflow and inflow must be maintained properly. The ultimate reason to prepare the statement of cash flow is to ascertain the changes in the cash position of the business entity. By enabling the financial policies and evaluating the cash position, a statement of cash flow helps in managing the business.

If you want to know more about a cash flow statement, keep reading this article.

Cash Flow Statement Templates

What is Cash Flow?

Before we move on to the details of a CFS, you need to understand what cash flow really means. Cash flow is basically the net amount of cash equivalents and cash that are moving in and out of your business. If there is a positive cash flow, that signifies that the company is a liquid asset, re-investing in the business, enabling to settle debts, paying expenses, returning money to shareholders, and providing a buffer against future financial challenges.

On the contrary, a negative cash flow highlights that the assets of the company are decreasing. Additionally, the net cash flow is determined from net income including accounts receivable and other items due to which payment has not yet been received. Required for assessing the quality of the company’s income and determining its liquidity, a statement of cash flow determines if the company is solvent or not.

What is a Statement of Cash Flow?

A CFS is actually one of the main financial statements of a business that is publicly traded and liable to disclose to the public and the United States Securities and Exchange Commission i.e. SEC. This financial statement provides the average data for all the cash inflows the business receives from its operations along with the cash outflow that the company pays for the business investments and operations during a given time period.

There are two methods to make a CFS and two forms of accounting, including accrual and cash-based systems. The public limited companies normally use accrual accounting which determines that the income statement in the annual report is not similar to the company’s cash position while private limited companies generally use the cash accounting technique. Moreover, the two methods, including the direct and indirect method to create the CFS, are kind of technical too. You will get to explore about its details in the further sections.

Why is a Cash Flow Statement So Important to Generate?

The statement of cash flow is really essential to create in every business not only because it a legal requirement, but also because it helps in gauging the financial position of the business. Check out more reasons why it is necessary to create this form of financial statement.

Legal Requirement

No matter how big or small a business is, every business is legally required to make a statement of cash flow to help users to make proper analysis of the financial statement. In addition to this, no business is permitted to carry out operations without following the law; therefore, it becomes essential for business owners to generate a CFS. If a business wants to succeed in the competitive arena, they must include making a statement of cash flow in their strategic plans.

Cash Forecast

A CFS is one of the three important types of financial statements which help in managing the cash forecast in the near future. Additionally, this financial statement aids in managing the cash position which is the base for all operations. This is why the management can easily understand the business’ financial position. The transactions including cash are recorded in the operating, investing and financial section and hence, the outflow and inflow are calculated on this basis. Out of the remaining cash, the management is then able to forecast the amount of cash.

Current Cash Position

As mentioned above, a CFS deals with cash only; hence, it is actually a significant pointer about the current position of the cash. The increase or decrease in cash and the relevant reasons help the management of the business in revealing the current position of the cash. Highlighting the current cash position, it also explains the reasons why you might have an unhealthy cash balance, even if there are losses or profits. Also, the financial statement helps the business owners in comparing the original forecast with the expected one and to clearly understand the movement of cash and its variation.

Financial Risk

It is really important to understand the components and sections of the financial structure of the business. This is essential to know because it helps in understanding the financial risk along with the business risk. With the CFS, businesses can get an insight as to why an overdraft or excess money exists in the company’s financial statement.

Solvency and Liquidity

There is no doubt that liquidity and solvency of the business are actually the key factors for the long term success of the business. A business that does not meet the immediate cash requirements is considered weak in terms of its financial position. The CFS alerts business owners about the solvency and liquidity of the business. This helps the management in taking necessary actions for the survival of the business.

Valuation Purpose

The valuation of any business is entirely based on the cash flow of the business. When a CFS is generated, it plays a major role in determining the value of the business and whether investing in it is worthwhile or not.

The importance of a CFS should not be ignored by business owners because without this financial statement, a business might land in a lot of trouble.

Cash Flow Statement Examples

What are the Components of a Cash Flow Statement?

The statement of cash flow is different from other financial statements, including the balance sheet and income statement. It does not include the amount of future outgoing and incoming cash on credit basis; instead, it is on current basis. This is why the cash is not similar to the amount mentioned as net income in the other two financial statements. There are three components in the cash flow statement template which are explained below.

Cash Flow From Operations

The first set for the cash flow transactions is from the operational business activities. It measures the cash inflows and outflows from the core business activities. The amount of cash generated from the company’s products and services is actually shown in it. Also, the changes made in the inventory, depreciation, accounts receivables, accounts payables and of course, cash, are reflected in cash from operations. It actually starts from the net income, reconciling all the non-cash items to cash items that are within a business operation.

This means that if the account receivables go up, it means that the sales will also go up, showing that the cash was not received at the time of sale. To sort this out in the cash flow statement, the receivables are deducted from the net income as they are not in the form of cash. Furthermore, they are included in the depreciation account, accounts payable, amortization and numerous prepaid items booked as expenses and revenue without any associated cash flow.

Cash Flow From Investing

The second set for the CFS is from investing in business activities. The items that are directly related to investments, such as changes in equipment and assets, are included in this second section. When cash is used to buy new assets, such as equipment, buildings, or short term assets like marketable securities, cash changes from investing, to a cash out item. On the other hand, when the company divests from an asset, the transaction will be considered as a cash in item for calculation of cash.

Cash Flow From Financing

The third set for the statement of cash flow comes from the finance of business activities. This section includes items coming from the changes in loans, debts or dividends that are accounted for cash from financing. The changes in this section are considered as cash in as soon as the capital is raised while they are considered cash out when dividends are paid. For example, if  accompany issues bonds to the public, the company actually receives cash financing, while the cash is reduced when the company is paying interest to the bond holders.

Statement of Cash Flows Samples


What are the Methods Used to Create a Cash Flow Statement?

To prepare the cash flow statement template, the company has two choices. The first one is the direct method and the other one is the indirect method. Though both of them have certain technicalities, the direct method is considered the easiest among the two while the indirect method is a bit complex. If you do not know the way to calculate it, you can look through the online statement of cash flows examples to understand it properly. Let’s explore both the processes in detail below.

As mentioned above, the CFS has three sections. The operating section determines the assessment of the organization’s position on terms of its core business activities. Cash from investing activities determines the cash from property, plant, equipment, profit and losses from investments and disposition of assets. The last section shows the uses and sources of cash from bank loans, debt and equity offerings, dividend payments and loan repayments. These three sections can be calculated by any of the two methods;

Direct Method

This is one of ways for the company to calculate the CFS for showing to the shareholders. When it comes to calculating the operating activities, the International Accounting Standards (IAS) and US Generally Accepted Accounting Principles (GAAP) suggest companies to operate cash flows using the direct method. They recommend this method because this method is really very easy to understand and straightforward.

This method has the ability to sort out all the transactions of the company and summarize them into categories, just like sorting out checks and taking a bank statement and deposits by source inflow. For instance, the operating activities include cash inflows, cash collected from customers, a list of outflows as rent and numbers to derive cash from operations under the direct method.

Indirect Method

Unlike the direct method, the indirect method is a bit technical, difficult and complex. It is basically a reconciliation of accrual accounting to cash from operating activities. This means that it will record the expenses and revenues as they occur, no matter when the cash changes. For instance, a company can record sales even if the customer has not paid for the invoice in accrual accounting. Under the indirect method, the company will adjust the net income in the cash statement on accrual basis rather than on cash basis.

Free Cash Flow Statements

Benefits of Preparing a Cash Flow Statement

A CFS is really essential to be created by law. Along with the legal requirement, this financial statement has several benefits too. Let’s check them out below.

  • It provides information and details about all the inflow and outflow of the cash from all the sources.
  • The methods used in CFS are easier to understand by even non-accountants.
  • It determines the actual cash position of the company between the two balance sheet profit and loss account and flows highlighting the liquidity and solvency of the business.
  • It helps the company in accurate projections regarding the future liquidity and forecast of the company.
  • Used by many investors and analysts as a filter to judge whether or not the business has prepared the financial statements properly.

With payments for expenses flowing out and revenue washing in, cash flow in your business is just like the waves in an ocean. This is why it is not easy to capture the picture of the flow of money as its constantly changing. When you handle your cash flow using CFS, it becomes easier for you to keep a check on them and see if your company is solvent.

Time for Action!

If you wish to create a current cash flow statement for your business, you can easily download cash flow statement templates from our main website.

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TemplateLab May 3rd, 2019