A cash flow statement is an important financial management tool that gives a fair idea about an organization’s financial health. It portrays a detailed picture of the flow of cash that covers the major cash-generating bone of the business, the sources of cash generation, spending activities and the major investment activities that help generate cash throughout the year.
A cash flow statement comprises three components: Cash from business operations, cash from investment activities, and cash from all the financing activities of the business.
Here are 7 things to check in a cash flow statement from the lens of efficient and affordable accounting:
1. Flow of Cash in Operational Activities
It is based on two segments – receipts from the customers and the payments made to employees and suppliers. However, to get a better idea about the cash involved in operational activities, it is better to look at all the components involved such as after-tax profit, depreciation, etc. This tells you about the movement of working capital and will give an idea about the activities that generate the principal revenue in the business.
2. Changes in Working Capital
Analyzing the working capital is integral to finding out which operational activities bring about a significant increase in the cash flow – if it is from receipts from the debtors or from the deferred payments of payables, etc. A positive working capital is a positive sign indicating that less cash is tied up in everyday operations. However, if it is the contrary then it can be a warning signal for the business to revisit and revise its spending activities.
3. Capital Expenditure or Capex
The capital expenditure is an indicator of where the capital of the business is being invested. It could be invested in setting up new plants, machinery, etc., that point out to expansion plans or non-principal activities like investing in securities, giving out loans to third parties, etc. Analysing Capex is beneficial for long-term financial planning.
4. Net Cash Flow
Also called the “net cash decrease/increase for the period”, the net cash flow falls in the final portion of the statement and is a combination of all the previous sections. It is indicative of the true cash value in business accounts at the end of a set period. This balance can be either negative or positive. While a negative figure need not be a cause of worry if the business is expanding and is performing well, a recurring negative figure should be a cause of concern and should prompt the business to think of ways to turn it around.
5. Cash Flow in Financing Activities
This helps identify whether the business is succeeding in paying out huge debts or requires assistance from the Board to pay for the dividends. It is helpful in reflecting who really is financing the business. It also tracks the overall debt movements of the money borrowed and repaid, dividends, and the capital raised in the equity market.
6. Notes
Notes should not be underestimated when it comes to cash flow statements. They provide useful information and disclaimers used to prepare the cash flow statement. For example, notes will help determine if the cash flow in non-current investments is made in mutual funds, fixed deposits or bonds/debentures. Notes can provide detailed information upon the strategy and direction of the organization which statements alone may not provide.
7. Pitfalls
Cash flow statements are sensitive to the transactions that occur even on the last day or in the last week of the concerned time period. It is best to get some expert accounting service to avoid such pitfalls!
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