Probing Into Your Business Cash Flow

August 1, 2013 10:42 am0 commentsViews: 1236

Distinction Between Cash Flow Statement and Cash Flow Report


Do you understand your Cash Flow Statement?  Do you monitor your cash using the Cash Flow Report?  Both are financial report tools that will assist you to manage and analyze your cash and business finances.  But how do they differ?  How can you utilize both these reports effectively?  Let us probe into them to distinguish one from the other …

Cash Flow Statement


The cash flow statement is another financial statement that business owners and managers should become familiar with. It is another financial reporting tool that shows how changes in the balance sheet and income statement affect cash. The cash flows are analyzed in three sections: cash from operating activities, cash from investing activities and cash from financing activities. The data shown on the cash flow statement are useful in determining the financial strength of the firm and its ability to function as an ongoing concern.  CF_statement


Operating activities include the production, sale and delivery of the company’s products or services. These are the regular day-to-day business operations of the firm which generate its operating revenue. This section will include any changes (increase or decrease) in the current assets and current liabilities of the firm.  Depreciation, taxes, and amortization of intangible assets (e.g. patents and software licenses) are also included in this section.

Investing activities include capital expenditures and long-term investments.  The purchase and/or sale of plant, property and equipment should be part of the changes (increase or decrease) in capital expenditures.  Long-term investments made on behalf of the firm are also included in this section.

The financing activities represent the changes (issuance or re-purchase) of bonds and stocks of the firm. These are the money owed to outside entities such as banks and shareholders.  This section also includes dividend payments to the owners and shareholders of the company.


The cash flow statement will contain a bottom-line, the net increase (or decrease) in cash. A positive cash flow statement indicates that the firm is liquid and can sustain its business operations and outstanding debts.  If a company is negative in cash, it will have issues paying its short-term debts and have difficulty managing cash operations.  Hence, the business owners and managers have to find other productive ways to generate cash.  As an analytical tool, the cash flow statement determines the short-term viability of a company, particularly its ability to pay bills.  


Cash Flow Report


The Cash Flow Report can either cover the actual cash flow for a certain period or projected cash flow for succeeding period.  The actual Cash Flow report contains the summary of the cash receipts and disbursements of the firm for a covered period.  The report monitors and summarizes the actual money that flows in and out of your business. It is critical to monitor the actual cash flow report on a cumulative basis (daily, weekly, monthly, quarterly and annually) but it is best practice to prepare the cash flow forecast on the same basis using daily, weekly, monthly, quarterly and annual projections. The Cash Flow Forecast is a useful financial tool for cash flow budgeting in order to avoid running out of money.  


A basic cash flow report should contain the following :

1. Beginning Cash Balance: Contains the cash available maintained on hand and in the bank(s) at the beginning of the period.  

2. Cash Receipts (or Projected Cash Receipts) : Cover all the activities that bring cash to your business – such as cash from sales and receivables (collections from clients and other trade parties).

3. Cash Disbursements (or Projected Cash Disbursements) : Cover all the expenses that take cash out of your business. Items commonly listed here include cash used to pay rent, salaries, supplies, loans, taxes and other operating expenses.

4. Ending Cash Balance : Calculated by adding the beginning cash balance and cash receipts, then deducting the cash disbursements.   “Ending Cash Balance” becomes the “Beginning Cash Balance” amount for the next period.

A negative “Ending Balance” or cash deficit means that you have paid and spent more than what you have earned and collected. To avoid the cash deficit, learn to manage your cash flow effectively by deferring your expenses or speeding-up your collections so that you will not deplete your cash reserves.  


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