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- What is cash flow statement a complete guide
What is Cash-flow Statement: A Complete Guide
You need to be abreast with how cash flows in and out of your company. Such information helps ensure that your business runs successfully and enables you to address concerns that could hamper your operations. To that end, a cash flow statement is of utmost importance. It gives a detailed picture of the movement of cash within your organisation. Continue reading to get you answer to the question - what is a cash flow statement?
What is a cash flow statement?
A cash flow statement provides the total cash inflows and outflows, in terms of cash and cash equivalents, within your company. This financial statement indicates cash flow from operational, investment, and financing activities.
You can consider a cash flow statement as one of the three most pivotal financial reports on any business. Along with a balance sheet and income statements, all registered companies must prepare a cash flow statement at the end of every financial year.
Thus, note that a cash flow statement is distinct from a balance sheet or income statement. While an income statement showcases a company's net income within a specific period of time, it includes all kinds of expenditures. On the other hand, cash flow statements are used to gauge the net cash income of a company. It only includes revenues and expenditures realised during an accounting period.
What is the structure of a cash flow statement?
Usually, a cash flow statement consists of three subdivisions under which all cash inflow and outflow are classified. You can conduct a cash flow analysis for each of these sections to collate data regarding the cash flow within your company. They are as follows:
Cash flow from operations: The initial section of a cash flow statement provides a summary of all cash inflow and outflow that stems from a company’s operational activities. Thus, the first entry pertains to the net income computed in a company’s income statement for a corresponding period.
Cash flow from investing activities: This section highlights the cash inflow and outflow realised via the investing activities of a company in a specific accounting year. These activities include buying and selling fixed assets and investments and disinvestments in securities.
Cash flow financing activities: The third and last section of a cash flow statement represents the cash inflow and outflow of a company via financing activities. These activities are important because they are linked with the company’s capital, whether owned or borrowed.
How to prepare a cash flow statement?
You can prepare a cash flow statement by following either one of the two methods listed below:
Direct method: This method entails adding and deducting all cash-related transactions within an accounting period to calculate the net cash flows. The transactions are obtained from the opening and closing balances of relevant documents.
Indirect method: With this method, you can obtain the net cash flow by using the net income as shown in a company’s income statement. Again, the cash and non-cash transactions are added and deducted to arrive at the net cash flow.
Cash flow statement analysis can be hugely beneficial for your business and can help you assess your company’s financial position. It can help you understand if your company is capable of handling short-term and long-term liabilities. Thus, ensuring that your cash flow statement is accurate and up-to-date is crucial.
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*Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. HDFC Bank SmartHub Vyapar is available to only Individual & Sole Proprietorship entity and for select Current Account variants only. For other entity types, please connect with the nearest branch.