What You Need To Know About Cash Flow Statements
You have to create many different types of documents when you are starting a business, and you may become overwhelmed with the amount of paperwork necessary. However, these documents give you a clear plan and strategy. They guide you through your startup and growth process. For example, cash flow statements reveal your company’s health and are vital documents when you need to pursue additional funding.
What They Are
These statements summarize your budget. They provide information about all incoming revenues and expenses and denote any change in your company’s cash and cash equivalents. They bridge the gap between your income statement and balance sheet. These statements display your operations, financing and investments as net cash flow.
Benefits of These Statements
You may use these statements to verify your company’s profitability. They also reveal the liquidity of your assets because they focus on your cash position. They promote cash management because you can estimate different types of cash and revenue flows both into and out of the company. They can also be used to verify your capital cash balance. For example, you can easily detect any shortages or excesses in cash that will require additional borrowing or promote reinvestment in your company.
Cash statements also present future projections of income and expenses. This allows you to more effectively plan for the future and coordinate activities that help you meet your cash goals. These statements also provide you with a better understanding of your company than simple accrual accounting methods.
Statement Preparation
To prepare your statement, you need to first calculate your net income. Although this number is stated on your income statement, be sure to double check it. Net income is calculated by subtracting your losses and expenses from your gains and revenue. This is typically done based on accrual accounting. Therefore, you will need to take your actual cash received during a specified period and subtract all your expenses from that period, including your cost of goods sold, inventory and accounts payable. Cash interest and taxes are also subtracted.
Therefore, you need to adjust your net income so it becomes net cash from operating expenses, which focus on what you have on hand rather than what you have sold and are awaiting payment for.
You will then add your net cash from operating activities to your net cash from your financing and investing activities. The combination of these numbers is your net cash loss or increase.
Your cash flow will give you an idea of the general health of your company and whether it can pay its short-term debts and operating expenses. Therefore, consider maintaining these statements.