Even if you do the bare minimum regarding financial reporting, Cash Flow Statements can be critical. Cash flow is vitally important whether you are in the start-up phase or have been operating for a while. Your business may be making a decent profit (on paper) but if you do not have enough cash coming in to pay the bills, you will hit a wall.
Cashflow Statements have two main functions.
Your annual reports will include a (historical) statement showing the flows in and out of the business. The information in this report will enable you to see trends in cash flows in and out of your business. This information will enable you to make decisions about adjustments to your credit terms or customer/supplier management.
Another reason is that a profit and loss statement offers a summary of the operational transactions of the business (expenditure and revenue). It calculates the profit generated from the trading activities of the business. However, it does not provide any information about the investing and financing transactions of the business.
The fund statement or cash flow statement provides the business owner with a report on the liquidity of the business. It also discloses how much the business will generate funds from operations over the reporting period.
Proforma Cash Flow Statements
Proforma Cashflow Statements are planning tools that you can use to estimate the cash flows in the future. These statements will enable you to work out whether you will be able to pay your bills as and when they come due! These cash flow statements are calculated every month. The purpose of the statement is to monitor or plan the cash position of the business over the financial period.
Cash Flow Statements in Annual Reports
There are two approaches to presenting cash flows from operating activities in the financial statements at year-end.
The first is the direct approach, which involves reporting gross operating cash inflows and gross operating outflows. An example of a statement below follows this format.
The second approach is the indirect approach. Based on the profit and loss statement but adjusted to reflect the cash flow from activities. This method reconciles the cash flows with the operating profit after tax as reported in the Profit and Loss or Income Statement.
This graphic shows an example of a statement that follows this format:
Other Financial Statements
If you landed on this page without seeing the other pages that relate to the other financial statements that you will be preparing for your small business, click on any of the links below.
- Balance Sheets,
- Income Statements, and an
- Aged Debtors Report.
