How this form of Financial Statement Benefits Business Owners
In order to properly create a concrete vision of the financial standing of any business, there are three key forms of financial statements that are necessary: income statement, balance sheet, and cash flow statement. As your source of reliable information about bookkeeping, accounting, and finance in the town of Kearny, Hudson and Essex County, NJ, Nicholas J. Coco, CPA will discuss one of these forms – CASH FLOW STATEMENT.
The Cash Flow Statement (also referred to as Statement of Cash Flow) of a certain business is a record and report of the amount of money/cash generated and spent over a certain period. It may be updated on a monthly, quarterly, or annually to properly and regularly monitor the cash flow in the business.
When we talk about cash flow or the flow of money in and out of the business, we can look at it from three different classifications: Operating Cash Flow, Investing Cash Flow, and Financing Cash Flow. These three have a direct impact on the results that we may derive from the Cash Flow Statement.
- Operating Cash Flow
- This form of cash flow typically includes the movement of money that is associated with basic operating activities such as purchases, sales, maintenance, improvement, and other expenses.
- Investing Cash Flow
- Capital Expenditures (CapEx, for short) or the form of cash flow that is usually used to purchase or sell property, plant, and equipment (PP&E), other financial assets, and non-current assets are included under this form of cash flow. So, basically, these are the forms of assets that are not included in cash equivalents.
- Financing Cash Flow
- When a business entity has a cash flow that is associated with paying or borrowing a bank loan and issuing or buying back shares, it is recorded under this form of cash flow. In short, this form of cash flow has a direct effect on the changes in the composition and size of the borrowings or equity capital of the business.
NOTE: There are essential items in the Cash Flow Statement that are not necessarily an actual cash flow; however items such as depreciation, amortization, and tax values are essential to monitoring the financial standing of the entity.
Now, how can a properly recorded Cash Flow Statement help a business?
- The cash flow records that are detailed under the Operating Cash Flow Classification can be compared to the business’ net income. This is done to know if the quality of earnings is good or bad. For example, if the inflow of cash from the operating activities is higher than that of the business’ net income, then the earnings of the company are considered “high quality”. However, if the results say otherwise, a business owner needs to study, and maybe reconstruct the operational strategies of the business to make the quality of earnings better.
- When eyeing for a potential investor, the Cash Flow Statement can make the whole presentation more convincing. Since this statement shows a record of how well or bad a business handles the flow of cash internally, presenting the statement to investors will give them a better idea of the overall performance of the business.
- One of the most important benefits of keeping a well-updated and regularly analyzed Cash Flow Statement is the immediate and clear vision of the business’ finances. See, if the business is actually funding the losses incurred from operations, or allocates a certain percentage to pay for a bank loan, or even financing investments, it is clearly stated in the Cash Flow Statement.
Overall, the Cash Flow Statement together with the income statement and balance sheet plays a vital role in helping the business get a good idea about how well the business is gaining or see if the business is losing finances.
Keeping records of all these three forms of financial statements can become tedious especially for solo business owners. This is where Nicholas J. Coco, CPA can help. With our expertise and knowledge regarding the matters that are connected to the financial aspects of the business, we can provide you with professional accounting consultation services and advice to help you and your business here in the town of Kearny, Hudson or Essex County, NJ. You can also check the other articles on this website to learn more!