“Our Income Statement shows that we are profitable, but how come our company is always strapped for cash? ” This is a common question 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 statement is one of the reports mostly overlooked especially by small business owners. Most of the time, they are not even aware that this financial statement is one of the basic reports they should be getting off their accountants.
The Cash Flow Statement shows the actual cash generated by the company for a given period. It is mainly composed of three main categories:
Money generated from or used in operations
Investments made by the company
Cash Flow from Operations
This class revolves around four activities:
Choices from customers
Payments to providers
Other operating cash outflows such as sales & marketing and administrative expenses and interest payments
Cash taxes payments
A positive net cash flow from operations means that the company’s core company operations is able to sustain itself — the collections from customers are 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 enough to cover the daily costs plus expenses. This is quite expected to get companies who have just recently started procedures because efforts are still focused on product sales and marketing to build customer bottom. But management should always work to improve the net cash flow from operations to make sure investors that management is effective in controlling the financials and operations 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 factory equipment or business expansions.
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It also includes other monetary purchases (such as money market funds) and acquisitions of other businesses.
There is a negative net cash flow from financing activities if the company place money into investments during the time period. It is good to see a company re-invest some of its profits back into the business to cover depreciation of its fixed resources and/or to finance business growth.
Conversely, the net cash flow from financing activities is positive if the organization liquidated or sold some or all of its investments. This may occasionally be required to generate funds to augment the particular operational requirements of the business. Liquidating investments is better compared to borrowing funds from the bank or other lenders because the company will not have to pay passions.
Cash Flow from Financing Activities
This section shows the outside financing activities carried out by the company. The cash inflows through financing activities pertain to additional capital from investors or through borrowings from the bank or other creditors.
The cash outflows from financing activities, on the other hand, result from repayments associated with bank loans and other borrowings and/or money dividend payments given to investors.
Effective Cash Management
A big part of in operation is managing the funds. You need to make sure that your company’s cash inflows are timely and enough to cover your cash outflows. Your company will be attractive to potential investors when they see that your over-all operations produce adequate totally free cash flow (FCF). Free cash flow demonstrates your company has the ability to pay debts, pay dividends and facilitate the growth of the business.