Why do I need a separate cash flow statement?
Cash flow features regularly in our articles – and like many other people, we often refer to it as the “life blood” of any business, as it represents the net balance of money coming into your business over the course of a month, hopefully ending with a positive number.
But you might also find it useful to think of cash flow as being like your company’s digestive system. Income is like the food coming into your business, while any outgoings – stock, rent, bills, labour and so on – are like the energy your body uses when you exercise.
On top of that, there is the crucial question of when that ‘food’ in the form of outstanding invoices and overdue payments is actually received and ‘digested’ to become cash your company can spend on covering costs.
If you keep enough food coming in, and digest it fast enough, you will always have the energy – or available cash – to cover those essential outgoings.
How does a cash flow statement help?
You might already have a company income statement showing cash transactions – invoices paid to you, rent and utilities going out, payroll costs and so on – so why do you need a separate cash flow statement?
Remember that not every transaction your company carries out immediately translates into cash in or out; the prime example of this already mentioned above is when you send out an invoice, as while you are immediately owed that money, it might not be due for 30 days or more.
Outstanding invoices and other transactions that have not yet turned into cash are recorded on the income statement, along with outgoing payments that have not yet been sent, such as scheduled salaries.
The actual amount of money your company has at its disposal depends on turning as many of these pending events as possible into disposable income – turning the potential of cash into a reality.
Structuring a cash flow statement
The precise factors you include in a cash flow statement may vary depending on any specific categories of income and outgoing your company has to deal with, but in general a cash flow statement includes the money coming in from day to day operations, along with money in and out due to investment activity, and a section for any business finance.
Investments don’t just mean stocks and shares – they can also include assets like your business premises – while finance includes not just any business loans you have, but also shareholder equity.
By structuring your cash flow statement to encompass all of the different cash inflows and outgoings over the course of a month, you can ultimately calculate a single figure to show your overall increase or decrease in disposable cash at the end of that period – one number to show how your company performed in cash terms.
Checking the cash flow statement figures
Finally, keeping a separate cash flow statement not only gives you a single point of reference to see how well you have performed over a given month; it also acts as a double check against the figures on your balance sheet.
If you have a balance sheet that shows a figure for cash under ‘Assets’, then your cash flow figure for any given month should be equal to the difference between that month and the previous month’s cash balance.
A rigorously maintained cash flow statement will therefore allow you to verify the data on your balance sheet – allowing you to move forward into the next month with total confidence about how much money you have at your disposal.