“Our Income Statement shows that we are rewarding, but how come our company is definitely strapped for cash? ” This is a common issue I get from managers and business owners alike. And I always let them know that the Cash Flow Statement is one place to look for answers. This financial declaration is one of the reports mostly overlooked specifically by small business owners. Most of the time, they are not even aware that this financial statement is among the basic reports they should be getting using their accountants.
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The Cash Flow Statement shows the actual cash generated by the organization for a given period. It is primarily composed of three main categories:
Funds generated from or used in operations
Investments made by the company
Cash Flow from Operations
This class revolves around four activities:
Series from customers
Payments to suppliers
Other operating cash outflows like sales & marketing and administrative costs and interest payments
Cash tax payments
A positive net cash flow from operations means that the company’s core business operations is able to sustain itself – the collections from customers are usually enough to cover the day-to-day requirements of the business.
A negative net cash flow from operations means that the cash inflows from the company’s operations are not sufficient to cover the daily costs and expenses. This is quite expected regarding companies who have just recently started operations because efforts are still focused on sales and marketing to build customer foundation. But management should always work to enhance the net cash flow from operations to make sure investors that management is effective in controlling the financials and functions of the business.
Cash Flow from Trading Activities
This section usually shows the amount of cash spent by the company upon capital expenditures, such as new manufacturer equipment or business expansions. This section also includes other monetary purchases (such as money market funds) and acquisitions of other companies.
There is a negative net cash flow through financing activities if the company put money into investments during the time period. It is good to see a company re-invest some of its profits back into the business enterprise to cover depreciation of its fixed resources and/or to finance business enlargement.
Conversely, the net cash flow from funding activities is positive if the firm liquidated or sold some or even all of its investments. This may occasionally be required to generate funds to augment the operational requirements of the business. Liquidating investments is better compared to borrowing money from the bank or other lenders because the company will not have to pay interests.
Cash Flow from Financing Activities
It shows the outside financing activities undertaken by the company. The cash inflows from financing activities pertain to additional capital from investors or through borrowings from the bank or additional creditors.
The cash outflows from funding activities, on the other hand, result from repayments of bank loans and other borrowings and/or cash dividend payments given to investors.
Efficient Cash Management
A big part of running a business is managing the funds. You have to make sure that your company’s cash inflows are timely and enough to pay your cash outflows. Your company will be attractive to potential investors when they see that your own over-all operations produce adequate totally free cash flow (FCF). Free cash flow shows that your company has the ability to pay debts, yield dividends and facilitate the growth from the business.