Everything About A Cash Flow Statement

Meaning of Cash Flow

By Cash Flow, we mean the flow of cash in your personal or business account. Cash always flows either into your purse from others or out of your purse to others.

Any business activity involves cash transactions; both cash and cheques are considered as cash for this purpose. 

Either cash comes to you, or it goes out from you. This process of the incoming and outgoing cash is known as Cash Flow. Cash continuously flows either into your hands/business or out of your hands/business.

Cash Flow Statement

Now, coming to the statement, a cash flow statement is a statement showing the details of inflows and outflows of cash in monetary values in a prescribed format. It depicts the funds generated and spent during a particular period of the business. The receipts and payments are arranged in a systematic manner to provide a clear picture.

Importance of A Cash Flow Statement
The flow of cash needs to be tracked to better manage the business's funds. You need to know where your cash comes from and how you are spending it so you can break down and identify your spending habits. Once you have a full picture of your spending, you will be in a better position to manage your funds efficiently. For this purpose, you require the cash flow statements.

Types of Cash Flow Statements

Cash Flow statements are prepared in two different methods:

• Direct Method - This method takes the actual income and expenses received or paid during the period. These items are directly incorporated in this statement headwise. It can contain advance payments and advance receipts also. This will give you a real picture of the increase or decrease in your cash and/or bank balances.
• Indirect Method - In this method, you will start from the net increase or decrease as found from your records and go back to calculate the expenses and incomes during that period to explain the net figure.

Further, a cash flow is nowadays prepared in three unique steps in the modern finance system.

The Three Stages of Cash Flow are as follows:

• Cash Flow from Operating Activities
• Cash flow from Investing Activities
• Cash flow from Financing Activities

How to Prepare a Cash Flow Statement?

Here, I am going to explain the direct method of the Cash Flow Statement.

A cash flow statement is prepared by keeping a record of all payments and receipts during the period. All transactions are to be segregated into suitable account heads that you may deem fit for your purpose, or you can maintain the same account heads as in a trial balance or profit & loss account.

• In this Cash Flow Statement, you will record income received on one side and expenses incurred on the other side just like a Trial Balance format. 
• But the figures taken in this cash flow are actual receipts and actual payments during that period. 
• You should receive the physical cash, cheque, or draft during that period, for showing it in your statement. 
• Similarly, Record actual cash or bank payments made during that period on the expenditure side, and do not include accrued or unpaid expenses in this statement. 
• All figures that actually affect your cash or bank balance should be taken in this statement. No other figures should be included to get the correct picture.

The statement may be prepared either weekly, monthly, or on an annual basis. 

Sometimes, cash flow statements are prepared daily to track daily expenditure. You can have it prepared in all four formats for a better understanding and control of your business.

The figures are to be taken on an actual incurred basis. 

The Cash Flow and Profit & Loss Statements do not tally for any period because the P&L a/c includes total expenditure whether paid or not.

The figures in the cash flow show you all the income you received into your cash box or bank account during a particular period under study, and all the payments made during the same period, whether it is by cash or bank. So, the net effect of these receipts and payments will provide you a correct position of whether you are in plus or minus.

Benefits of Cash Flow Statements

• A cash flow statement gives you a picture of your receipts and expenditure during a period. It shows the spending nature of your business.
• With the help of a cash flow statement, you can track where you are spending more and where it is too low and, thereby, you can adjust and control your activities suitably.
• You can plan your project expansions and business growth with the help of this statement, which helps you identify expansion opportunities.
• Sometimes, banks and financial institutions may require cash flow statements to assess your repayment capability when applying for loans.