“Our Income Statement shows that we are profitable, but how come our company is definitely strapped for cash? ” This is a common question I get from managers plus business owners alike. And I always let them know that the Cash Flow Statement is one spot to look for answers. This financial statement 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 from their accountants.
The Cash Flow Statement shows the actual cash generated by the organization for a given period. It is mainly composed of three main categories:
Funds generated from or used in functions
Investments made by the company
Cash Flow from Operations
This group revolves around four activities:
Selections from customers
Payments to providers
Other operating cash outflows for example sales & marketing and administrative expenses and interest payments
Cash taxes payments
A positive net cash flow through operations means that the company’s core business operations is able to sustain itself : the collections from customers are enough to cover the day-to-day needs 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 for companies who have just recently started operations because efforts are still focused on product sales and marketing to build customer base. 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 Investing Activities
This section usually shows the quantity 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 opportunities (such as money market funds) and acquisitions of other companies.
There is a negative net cash flow through 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 enterprise to cover depreciation of its fixed property and/or to finance business development.
Conversely, the net cash flow from funding activities is positive if the business liquidated or sold some or even all of its investments. This may sometimes be required to generate funds to augment the 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
It shows the outside financing activities undertaken by the company. The cash inflows through financing activities pertain to additional capital from investors or from borrowings from the bank or additional creditors.
The cash outflows from financing activities, on the other hand, result from repayments of bank loans and other borrowings and/or cash 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 pay your cash outflows. Your company will be appealing to potential investors when they see that your over-all operations produce adequate free of charge cash flow (FCF). Free cash flow demonstrates your company has the ability to pay debts, yield dividends and facilitate the growth from the business.