The cash flow statement provides excellent insight into your business'a health at a particular moment.But the cash flow statement does more than that. Like an EKG, it can detect future problems as well as current ones. Irregularities might not prove hazardous in the present moment, but they can become destructive in the long run. A blip on your cash flow statement that seems out of sync with previous trends might foretell a pending setback for your business. However, if you arm yourself with extensive information about your cash flow, you will be better positioned to head off potential problems before they arise. That’s why learning how to prepare a cash flow statement is so critical. It enables you to ensure your business has the cash on hand to meet its immediate expenses, and they empower you to prepare for your long-term cash needs. With a full accounting of how much cash you have and where your cash is coming from, you can invest in your business's future without compromising its present operational viability.
#CaminoTip Make sure you understand the difference between cash flow and profit.
These include any cash that you acquire or expend operating your business. This includes revenue from sales (so long as you receive cash rather than credit) and expenses like salary, tax, and rent payments.
Outside of the standard operations of your company, you might take your business’ funds and invest them in real estate, the stock market, or other businesses. While these don’t represent your daily business activities, they are still impacting your cash flow and, therefore, must be represented in your cash flow statement. Any cash you earn and all cash you invest must be accounted for.
This category represents the cash you receive from outside sources to help support the operation of your business, whether it’s loans or investments, the money you receive from these entities, and the money you pay back in the form of dividends or interest needs to be accounted for.
|Cash received from customers||$35,000|
|Cash paid to suppliers||- $15,000|
|Employee salaries||- $10,500|
|Other operating expenses||- $1,50|
|Cash from Operations||$7,850|
#DidYouKnow The direct method is used by businesses that use cash basis accounting. This method is recommended by the Financial Accounting Standards Board (FASB).
|Depreciation expense||+ $9,050|
|Gain on sale of equipment||- $23,000|
|Increase in accounts receivable||- $19,500|
|Increase in accounts payable||+ $16,300|
|Cash from Operations||$7,850|
#DidYouKnow The indirect method is used by businesses that use the accrual method of accounting. This is the preferred method of small businesses and the most commonly used.
To operate effectively, you need cash on hand. Therefore, the cash flow statement measures how effectively you can operate at any given moment.
Because cash flow is such a significant measure, other businesses measure it, too. Especially if your business is relatively new and doesn’t have the history of knowing how much cash it needs and when it needs it, it’s a useful exercise to compare where you are relative to businesses similar in size and mission. If you’re in a dramatically different place than comparable successful companies, then that’s a red flag that something needs to change.
Acquiring a business loan can be a difficult decision, but your cash flow statement can make it easier to decide. Your cash flow statement tells you how much cash you need relative to how much you’re taking in and sending out, and armed with this knowledge; you will know whether you need more cash. If you do, then a business loan might be the right choice.
At Camino Financial, we provide small business loans to cover your working capital needs. In fact, many of our borrowers use our loans as an immediate source of cash flow and funds to cover their operative expenses. Through a quick and easy online application process, you can receive your funds within 4-10 days, so the healthy rhythm of your business doesn’t get interrupted.
Keeping track of your books means that accountants maintain a close eye on the cash of your business.
In the event of an IRS audit, or simply to ensure that taxes are paid properly, your accountant needs to see and understand where cash is coming from and going to on a highly detailed level. By keeping things organized with a cash flow statement, your accountant doesn’t need to go digging for every scrap of information; he or she doesn’t need to spend hours sifting through receipts and people’s emails.
In short, your cash flow statement helps your accountant be more accurate and timely.
Before loaning money to businesses, lenders do their homework. They engage with businesses with a track record of bringing in cash and paying their bills (when they’re due).
So the cash flow statement not only helps them ensure they’d be comfortable lending you money, but it also helps you prove your trustworthiness and dependability. Cash is the metric that lenders and creditors want to see. Without having this information available, they’re less likely to go into business with you—even if your cash flow is good.
If you can’t prove your business’s health, it’s not worth their time (or the risk).
Again, your cash flow statement is your means of proving yourself. It’s your resume, your transcript, your report card. It’s an indicator of your company’s value and a predictor of future earnings.
That’s how you acquire new shareholders and how you convince past shareholders to keep their stake in your business. In the cash flow statement, you also track all dividend payments made to shareholders so they can see how their investment is paying off.
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