Cash flow statement: a step-by-step guide to preparing your own

Unleash the power of your financial health with a cash flow statement! This crucial document is the heart and soul of financial management, providing an in-depth look at the flow of cash in and out of your business. Understand your cash flow with this Legal Kitz blog post and make smart financial decisions and securing a strong financial future.

What is a cash flow statement?

A cash flow statement is a financial report that details the flow of cash in and out of a business over a specific period of time, usually a month or quarter. It provides valuable insight into a company’s financial health and helps stakeholders understand how the company is managing its cash.

What does it track: A cash flow statement tracks the inflow and outflow of cash in a company over a specific period of time. It provides information about the company’s operating, investing, and financing activities that affect its cash position.

What does it tells you: A cash flow statement tells you the ability of a company to generate cash, how much cash is being used in operations, and how much cash is available for investment or distribution. It gives a clear picture of the company’s financial health, highlighting any potential cash flow problems, and helps in making informed business decisions.

Parts of a cash flow statement

A cash flow statement provides a snapshot of a company’s inflow and outflow of cash, including operating activities, investing activities, and financing activities.

It is divided into three main parts:

  1. Operating Activities: The section shows the inflows and outflows of cash from day-to-day business operations. This includes sales, purchases, and other expenses incurred in running the business.
  2. Investing Activities: The section covers the purchase and sale of long-term assets such as property, equipment, and investments in other companies. It also includes any loans made to other entities.
  3. Financing Activities: This section includes the transactions related to financing the business, such as issuing bonds, taking loans or repayments, and any dividends paid to shareholders. This section highlights the company’s ability to generate cash from external sources, such as issuing stocks or borrowing funds.

A cash flow statement is necessary to keep track of a business’ financial situation. Check out Legal Kitz website for legal advice on how to run your business.

The importance of a cash flow statement

A cash flow statement is important because it helps the business to manage its cash flow efficiently and effectively. The statement provides insight into the company’s liquidity and financial position, which is crucial in making informed business decisions. A business can also use the statement to identify potential cash flow problems and develop strategies to resolve them.

Additionally, the statement can help to identify areas of the business that are generating positive cash flows and those that are consuming cash. This information can help to prioritise investments and allocate resources to those areas that will generate the highest returns.

Overall, a cash flow statement is a valuable tool for any business, as it provides a comprehensive view of the company’s cash position, which is crucial for maintaining financial stability and growth. By keeping track of cash flow, a business can identify potential problems and take proactive steps to address them, ensuring that the company remains financially healthy for years to come. If you want to know more about the importance of legal financial decisions in a company, get familiar with our knowledge centre at Legal Kitz.

How to prepare a cash flow statement

A cash flow statement is a document that provides information on a company’s inflows and outflows of cash. Here are the steps to prepare a cash flow statement:

  1. Gather all financial information for the reporting period, including income statements and balance sheets.
  2. Determine the cash inflow by calculating the cash received from sales and other sources of revenue.
  3. Determine the cash outflow by calculating the cash spent on operating expenses, investments, and other expenditures.
  4. Subtract the cash outflow from the cash inflow to determine the net cash flow.
  5. Present the information in a clear and organized manner, including sections for operating activities, investing activities, and financing activities.
  6. Review and verify the accuracy of the information.
  7. Finally, prepare a summary of the cash flow statement and provide an explanation for any significant changes in the cash balance.

By following these steps, you can create a comprehensive cash flow statement that accurately represents the financial health of your company.

How to read a cash flow statement

To read a cash flow statement, start by understanding the three sections: operating activities, investing activities, and financing activities.

Operating activities show how the company generates cash from its day-to-day operations, while investing activities show how the company uses cash to purchase assets. Financing activities show how the company receives or uses cash from lenders or investors. Look for positive numbers in the operating activities section, as this indicates cash inflow. Pay attention to negative numbers in the investing and financing activities sections, as this indicates cash outflow. The net change in cash at the bottom of the statement will show the overall effect of all cash flows. Understanding a cash flow statement can give you valuable insight into a company’s financial stability.

Cash Flow Statement

Example of a cash flow statement

Cash Flow Statement For the Month of June

Table:

Cash InflowsCash Outflows
Sales RevenueSupplies
Loan ReceiptsRent
Interest IncomeWages

Written example: For the month of June, the company’s cash inflow was $100,000 from sales revenue, $50,000 from loan receipts, and $5,000 from interest income. On the other hand, the company’s cash outflow was $30,000 for supplies, $10,000 for rent, and $40,000 for wages. As a result, the company’s net cash flow was $75,000. The company’s sales revenue showed a significant increase compared to the previous months, which is a good sign for the company’s financial performance. However, the company needs to be mindful of its expenses, especially for supplies and wages, which took up a large portion of its cash outflow.

Legal advice

It can be confusing first understand the process of a cash flow statement – you don’t have to do it alone!

Our sister company, Business Kitz, offers a wide range of high quality and cost effective business and legal document templates that can help you keep your finances in order, including the business and accounting kit, and invoice template. If you are seeking any legal advice, Legal Kitz is here to assist you. To arrange a FREE consultation with one of our highly experienced solicitors, click here today, or contact us at info@legalkitz.com.au  or 1300 988 954.