Cash Flow Statements – A Quick & Easy Guide for Business Owners

Cash Flow Statements – A Quick & Easy Guide for Business Owners

One of the three financial statements that are essential for any organisation is the cash flow statement. The income statement and balance sheet are the other two. Here, we’ll examine more closely this crucial financial statement and its operation.

A cash flow statement is what?

A financial document called a cash flow statement, often known as a statement of cash flow, as it gives an overview of how money and it’s equivalents are coming into and going out of a business. The terms “cash inflows” and “cash outflows” also apply to them.

It’s mostly used to assess how effectively a business is producing cash and preserving its income. This financial reporting report demonstrates if a business has adequate cash on hand to pay its obligations and cover its operating costs. The balance sheet and income statement are enhanced by the cash flow (CF) statement.

What is the purpose of a cash flow statement?

People utilise the cash flow statement in many ways to comprehend a business’s financial situation. It demonstrates how cash flows from financing, operations, or operating activities. Here are a few uses that businesses make of this document:

·         Cashflow statements are used by investors to comprehend a business’s operations. They can observe the source of the business’s funding and the way it is being used. Investors can determine a business’s performance and financial stability using this statement.

·            Creditors can determine how much cash (liquidity) a business has on hand by looking at its financial statement. They try to establish whether the business has enough money to cover costs and pay off debt.

Statement of Cash Flow Composition

The vital parts of the cash flow statement are listed below:

Cash flows from:



           Financing operations are all examples of cash flows.

This statement may occasionally include a list of non-cash transactions or activities that need to be disclosed.

About the three financial statements, many individuals are perplexed. They believe that they are related and similar. All these assertions differ from one another in reality. The absence of the amounts of current outgoing and future incoming cash, which are typically recorded under credit, distinguishes the cashflow statement from the other two financial accounts.

As a result, money is not the same as “net income”. While the balance sheet and income statement detail both cash transactions and credit sales where the buyer agrees to pay within a certain period of time, such as after 30 days.


Operating Procedures

Operating procedures/activities are the sources and users of cash that result from carrying out business operations on the cash flow statement. Simply said, it shows how much money a business makes by selling its goods or services.

You can include the following components or financial items in your operating activities:

Interest payments, cash from sales of goods or services, rent payments, payments to suppliers of goods or services used in production, employee wages or salaries, and income tax payments are just a few examples.

Cash from operations includes items like accounts receivable, changes in cash balances, inventories, accounts payable, and depreciation.

A business’s trading or investing portfolio may contain receipts from the sale of debt, equity, and loan instruments.

If a company creates a cash flow statement in an indirect manner, they may additionally put the following in it:

Profits or losses resulting from noncurrent assets; Amortisation; Deferred tax; Depreciation; Income or dividends you get from investment operations.

But businesses are not required to classify sales or purchases of long-term assets as operating operations.

Making a cash flow statement calculation

The variations in revenue, credit transactions, and cash expenses (which appear on the balance sheet and income statement) resulting from transactions that took place during a certain period are added to or subtracted from net income to compute and create statements of cash flows.

As non-cash items are included in net income (seen on the income statement) and total assets and liabilities, they make these adjustments (balance sheet). When compiling the cash flow statement from operations, accountants re-evaluate the majority of the items because the majority of transactions do not involve actual cash.

There are two ways to determine cash flow: direct and indirect

The direct approach and the indirect technique are the two ways to compute cash flow:

With the direct technique, you total up several kinds of receipts and cash payments, including cash for salaries and cash receipts from clients. Apart from noting the net growth or reduction in these accounts, you calculate these statistics utilising the beginning and ending balances from other business accounts. While assessing cash flow using this method, accounts receivable and accounts payable are not taken into account.

While using the indirect approach, you take into account all operating activity cash inflows and subtract net income from the income statement. On an accrual basis, businesses generate their income statements. While adopting accrual accounting, revenue is recognised regardless of whether payment has been received by the business. The same is true for spending, thus cash flow includes both accounts receivable and accounts payable.

Investment Ventures

An investment activity shows how a business allocates its resources for investments. This category includes items like the purchase or sale of fixed assets or short-term assets like new equipment. The phrase “cash out” is used when a business purchases real estate, new machinery, etc. When a business decides to sell an asset, they refer to it as cashing in.

Variations in cash flow might have an impact on working capital depending on the type of transaction. As an illustration, if a business buys a fixed asset like an office building, its cash flow would fall. Due to the decline in the cash component of current assets, the business’s working capital would likewise decline.

Because inventory and cash are both categorised as current assets, the working capital of the business would not change if it paid for inventory with cash. Nonetheless, the inventory purchases would result in a decreased cash flow.

Finishing it off


You may determine the profitability and power of a business by utilising a statement of cash flows. When it comes to cash flow, you can get an idea of what the future holds for a business. It will inform you if the business has enough money to pay off debts with liquid cash on hand. While creating a budget, this financial document is useful. Unsecured business lenders also take a business’s cash flow into account when deciding whether to lend money.