An Easy Guide to the Statement of Cash Flows
Most people believe that they need an accounting or finance degree to make intelligent business decisions, but this couldn’t be further from the truth. The entrepreneurs behind various start-ups, medium-sized businesses, and even multinational corporations didn’t always have a business degree. Instead, they learned what they needed along the way, such as sufficient bookkeeping knowledge to monitor their companies’ performance and ensure they’re in good financial health. This is good news: regardless of your degree, you can still have what it takes to become a successful entrepreneur!
Learning how to deal with accounting documents, like the Statement of Cash Flows or cash flow statements, can be intimidating. However, it’s crucial for every business. It will help you identify potential problems before jeopardizing your business and course-correct to make sure that your purchasing and spending habits contribute to your success. Cash flow statements, in particular, are essential to understand for anyone who makes financial decisions in a company. Even if you decide to work with a Quickbooks keeper, it’s vital to understand your financial position and how it affects your operations.
Here’s what you need to know:
What Is a Statement of Cash Flows?
The Statement of Cash Flows is a single document that details your revenue and expenses for a specific period. It can cover any defined period, like a month, a quarter, or a year. It also illustrates how cash moves in and out of your business, linking the Balance Sheet and the Income Statement. You’ll be referring to this statement frequently when making any sort of financial decision.
The Three Important Transaction Categories
There are two types of transactions: those that generate revenue (assets) and expenses (liabilities). They represent business activities, both incoming (positive) and outgoing (negative), helping determine how your money is moving and where it is going. You can categorize these further into three: operating transactions, investment transactions, and financing transactions. By creating a Statement of Cash Flows, you can accurately identify how much cash you have at a given point in time.
The first type, operating transactions, reflects all the adjustments made to asset and liability balances during a specific period. It enumerates the beginning net income balance and adjustments for liabilities you’ve already paid for, like payroll taxes and business insurance. It also accounts for unpaid yet accrued expenses due and money in transit, like bank drafts that are still being processed. All activity outside of investing or financing belongs to this category.
The second type, investment transactions, contain generated income and capital expense transactions. For example, if you’ve bought and sold equipment needed for your company to function more effectively, all the income and expenses related to this activity fall under this category. Buying stocks, bonds, and the profit gained from selling marketable securities also belong here.
The last type, financing transactions, affects an organization’s composition, size, and sphere. These transactions often involve debt, dividend, and equity items. All financing transactions fund the company and help it operate, making this statement a reliable way to assess a company’s financial position. Potential investors and lenders often use this statement to determine the risks of funneling money into the company.
Financing activities can create a positive cash flow, while others result in a negative flow. A positive effect involves issuing bonds, selling stock or equity to investors, and getting a loan from a lender. Negative effect transactions include buying back stock, paying dividends, and debt reduction payments. While these transactions aren’t necessarily warning signs, they do prompt lenders and investors to scrutinize the cause of these activities.
Conclusion
Financial statements are reliable documents that display business activities and an organization’s overall performance. It demonstrates a company’s skill at generating revenue, how it funds its ventures and operations, and how it repays debts. By understanding the Statement of Cash Flows, you’ll have unhindered access to critical financial data that will help you make wiser decisions for your business.
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