What is a cashflow statement? #
The CashFlow Statement (sometimes referred to simply as a ‘Cashflow’) is the most important accountancy report used by managers running a business. It is one of the three key reports (Profit and Loss account and Balance Sheet are the other two) and it is the most important statement that can be used to understand the health and wellbeing of a business.
Each Cashflow statement reports on a set period of time, it has a start date and an end date. The report shows the cash generated and the cash used during the period. Its that simple, two totals, how much cash the company received in the period and how much it spent – and a total showing is the business had more cash at the end of the period than it did at the beginning, or less. It is normal to split the cash in and cash out into different categories.
You can choose to show a cashflow for any period, but it is normal to match the periods used for your P&L and present the two documents together along with a balance sheet for the end date of the reporting period.
Why do I need a cashflow statement? #
The cashflow adds information to the financial reports that are not in the other statements, the Profit and Loss Statement is prepared using the accrual basis of accounting, the revenues reported in it may not have been collected. Similarly, the expenses reported on the income statement might not have been paid. You could review the balance sheet changes to determine the facts, but the cash flow statement already has integrated all that information. As a result, savvy business people and investors utilize this important financial statement.
What does a cashflow statement actually do? #
The cash from operating activities is compared to the company’s net income. If the cash from operating activities is consistently greater than the net income, the company’s net income or earnings are said to be of a “high quality”. If the cash from operating activities is less than net income, a red flag is raised as to why the reported net income is not turning into cash.
Some investors believe that “cash is king”. The cash flow statement identifies the cash that is flowing in and out of the company. If a company is consistently generating more cash than it is using, the company will be able to increase its dividend, buy back some of its stock, reduce debt, or acquire another company. All of these are perceived to be good for stockholder value.
Some business valuation models are based upon cash flow.