Of all of the financial statements that you rely on to monitor your business, the cash flow statement is an essential one. In fact, cash flow statements are often requested by potential investors. This statement provides a clear picture of where the company's money is actually going, so it isn't affected by your accounting methods. Instead, these statements clearly illustrate what's been received as well as what has been paid out. Don't let your first cash flow statement intimidate you. Here's a look at what you need to know to get it right.
Start with Operating Activities
The first section of the cash flow statement should show how much cash your company has actually received and spent as part of your standard operations. This should include accounts that have been paid and any cash settlements. Don't include any invoices that are still outstanding – this should only reflect what's been received or paid. This section of the statement is detailed based on the activity in your accounts payable, accounts receivable, unearned revenue and prepayment accounts.
Include Investment Activities
The second section of the statement should focus on the cash transactions associated with investments. Include any current property transactions, equipment investments and facilities spending. You'll also need to consider any cash received from your long-term investments, capital equipment and vehicles. This is the place to account for new kitchen appliances in a restaurant or new machinery on a manufacturing floor.
Summarize Financing Cash Activities
In the third section, you'll want to address any financing activities. When you buy bonds and stocks for the company, it should be accounted for here. Any dividend payments or paid-in capital should be included here. If you get a loan through a business association, include that here, because that's cash you've received through financing.
Provide Explanatory and Supporting Details
If the cash flow information you present in the statement includes cash transactions that are out of the ordinary, you'll want to spotlight that in this final summary section. For example, if you face a change in your tax liability or you make an adjustment to your operations that affects your cash flow, you'll want to include that information here. It is an important part of identifying the anomalies in your activities so that investors know what applies to your routine business operations and what does not.
Now that you understand the fundamentals of the cash flow statement, you can approach the process with the confidence that you can create it accurately. If you're still uncertain about the process or want professional support, a small business accounting firm can help. To learn more about accounting services, visit Danta Chase & Co CPAs PS.Share