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Understanding Cash Flow Statements: What They Are, How to Read Them, and How to Prepare Your Own

Cash flow statements are an important financial document that provides companies with insights into their liquidity and financial health. Understanding them is important for investors, creditors, and even business owners themselves. In this blog, we will cover everything you need to know about cash flow statements; what they are, how to read them, and how to prepare them effectively.

What are cash flow statements?

Cash flow statements record the movement of money into and out of a business. These reports typically cover at least months’ worth of a company’s cash flow pattern. Maintaining a healthy cash flow is one of the most important aspects of running a successful business and these reports help owners and investors to understand how the business generates and uses cash, and allow them to better understand the long-term and short term viability of their business or investment

What are the three components of a cash flow statement?

  1. Operating Activities: This encompasses the cash flows from the primary activities of the business. These would include anything that contributes directly to revenue generation and operational expenses.
  2. Investing Activities: These are cash flows related to the acquisition and disposal of any long term long-term assets. Examples of this include property, equipment, or investments.
  3. Financing Activities: These are cash flows linked to raising capital and repaying debts, including issuing or repurchasing stock, and paying dividends or interest.

How do you read a cash flow statement?

  1. Step 1: Start with examining the beginning cash balance. This is the opening balance of cash for the period.
  2. Step 2: Analyze the operating activities of the business. In this analysis, look at cash flows from operations to assess the company’s core business performance.
  3. Step 3: Review the investing activities. Examine cash flows from investments to understand how the company is spending its capital to generate growth.
  4. Step 4: Assess the financing activities, and evaluate the cash flows from financing activities to gauge how the company is managing its capital structure.
  5. Step 5: Calculate the ending cash balance. This is the closing balance of cash for the period.

Cash Flow Report Template

This template is designed to be a basic structure for organizing cash flows from operating, investing, and financing activities, as well as calculating the net increase or decrease in cash and cash equivalents. Customization would need to be made to encompass the specific business activities and reporting requirements of your business.

How do you prepare a cash flow statement?

  • Step 1: Gather all of the relevant financial information for your cash inflows and outflows from operating, investing, and financing activities for the relevant period.
  • Step 2: Classify your cash flows, and separate the cash transactions into the three main categories: operating, investing, and financing activities.
  • Step 3: Summarize all of the cash inflows and outflows for each category to determine the net cash gained or used during the period.
  • Step 4: Prepare the cash flow statement. Organize the information into a structured cash flow statement format, including beginning and ending cash balances.
  • Step 5: Review and analyze the information presented in the report. Look for inaccuracies in the cash flow statement and analyze the trends and patterns to understand the company’s financial performance.

How LedgersOnline Can Help

LedgersOnline’s business bookkeepers offer a variety of financial reports, including cash flow reports. They can help you prepare the financial statements to present to your investors or analyze the performance of your company. Schedule a call and see how we can help you leverage profit and cash flow metrics to achieve a balanced approach to financial analysis and drive your long-term success.

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