Cash Flow Statement: A Comprehensive Guide
- Published: 14 January 2025
- 10 min read
- Bookkeeping
Heather Cameron
Business Writer
From expert guidance and helpful accounting tips to insights on the latest trends in fintech, Heather is here to empower entrepreneurs and small business owners in Singapore with great content. With a background in digital marketing spanning eight years, she has experience writing for various industries and audiences. As Osome’s copywriter, she’s here to inform and inspire our readers with great storytelling.
John Yap
Reviewer
John Yap, our Head of the Accounting Team in Singapore, brings over a decade of expertise in SFRS, corporate tax, and GST compliance. As a key blog reviewer, John ensures our accounting content is accurate and relevant, transforming complex concepts into actionable advice. With John's meticulous oversight, you can trust that our blog provides reliable and up-to-date information to help you navigate the intricacies of financial management and compliance in Singapore.
A cash flow statement reveals the cash movement within a business over time. It’s essential to understand whether a company can cover its bills and invest in growth. This guide will break down what it is, why it’s important, and how to interpret its main sections.
Key Takeaways
- A cash flow statement details the actual cash generated and spent by a company, reflecting its liquidity and ability to meet short-term obligations.
- The statement consists of three key components: operating activities, investing activities, and financing activities. By analysing the net cash flow, positive cash flow, and negative cash flow generated by each one, a company can learn about how much cash remains spendable as well as operation and investment efficiencies.
- Cash flow statements can be prepared using either the direct or indirect method, with the direct method providing clearer insights into cash transactions while the indirect method simplifies reconciliation with other financial statements.
What Is a Cash Flow Statement?
A cash flow statement is a financial report detailing a company's capital expenditures and gains over a specific period to provide clarity of the company’s liquidity and ability to meet short-term obligations. Another term for this report is the statement of cash flows, suggesting the document focuses on actual cash movements rather than accounting profits.
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Key Components of a Cash Flow Statement
The statement of cash flows contains three primary segments: operating activities, investing activities, and financing activities. Operating activities handle core business operations, investing activities pertain to asset acquisitions and disposals, and financing activities involve debt and equity transactions.
Operating activities
Operating activities are the heart of a business, encompassing the principal revenue-generating processes. This includes cash movements from sales, purchases, and other day-to-day expenses, reflecting the cash generated from products or services. For instance, the operating cash flow is calculated based on the total cash payments after all necessary adjustments, such as depreciation, deductions and taxes paid, and any changes in working capital.
Investing activities
Investing activities focus on cash transactions related to long-term assets. A balance sheet indicating the cash flow from investing shows how the acquisition and disposition of non-current assets affect your company's finances. For example, a negative cash flow means you may have purchased equipment or real estate, whereas a positive cash flow can refer to the selling of the above-mentioned assets.
The cash flow statement shows how efficient your company's operation, investment, and financing activities are by providing a detailed balance sheet across these sectors. This informs you of how your company generates cash, how the operating cash flow moves during the accounting period, and how much cash balance remains available for the future.
Financing activities
Cash flow from financing documents transactions related to raising capital and repaying investors., such as issuing shares, equity financing, borrowing, repaying loans, and paying dividends. They influence the company’s cash balance significantly and are a reflection of the company's strategies for sustainable growth.
Cash injected by loans shows up as a positive cash flow (inflow), while repayments are documented under the cash outflow category. Similarly, issuing new marketable securities, such as shares and stocks increases financial resources, whereas buying back shares or paying dividends returns capital to shareholders and results in a cash outflow.
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Direct vs. Indirect Cash Flow Calculating Methods
Businesses can choose between direct and indirect methods for cash flow calculation. The former subtracts cash disbursements from the total cash collections directly related to operating activities. Small businesses often prefer using cash-based accounting because it directly tracks cash transactions.
On the other hand, the indirect method starts with net income and adjusts for non-cash items and changes in working capital to calculate cash flow. While both yield the same final operating cash flow, they present the information differently, affecting how businesses and investors interpret financial performance.
Feature | Direct Method | Indirect Method |
|---|---|---|
| Starting Point | Total cash receipts by accounts receivable | Net income figure |
| Approach | Records actual cash inflows and outflows | Adjusts net income for non-cash items |
| Complexity | More complex and nuanced | Simple implementation |
| Financial Insights | Provides detailed information on cash inflows and outflows | Provides a broader overview of cash flow, including non-cash items |
| Suitability | Best suited for small businesses with simple operations | More suitable for businesses with complex operations and accrual accounting |
Direct method
Recording cash paid to and by the business ultimately creates a cash balance sheet by subtracting total cash payments from total cash collections, leaving you with your gross cash receipts. Although it can be more time-consuming to compile, the direct method makes it easier to understand how much cash a business generates from its core operations.
This method provides great details including income taxes paid, cash spent by accounts payable, interest paid and received, operational revenue, and more. Therefore, it's often chosen by small businesses looking for straightforward accounting practices to capture the actual cash flow in their bank accounts.
Indirect method
The indirect method begins with net income and adjusts for non-cash items and working capital changes to determine cash flow, such as adding back non-cash expenses. This method leverages accrual accounting information, making it more commonly employed by businesses. Starting with net income and adjusting for non-cash transactions simplifies the reconciliation between the income statement and the balance sheet.
For larger corporations with marketable securities and complicated cash activities that are not cash-related immediately, this method is more preferable because it creates a more thorough balance sheet.
Importance of Cash Flow Statements
A statement of cash flows is indispensable for assessing a company’s liquidity, solvency, and overall financial health. Unlike an income statement, which focuses on accounting profits, a statement of cash flows highlights actual cash movements, offering a more accurate measure of financial stability.
While both methods yield the same net cash flow from operating activities, they differ in their approach. The direct method focuses on actual cash inflows and outflows, while the indirect method adjusts net income for non-cash items. Choose the method that best suits your business's needs and accounting practices.<br>
Integrating cash flow statements with balance sheets and income statements offers a comprehensive understanding of financial performance. This holistic view is vital for evaluating a company’s short-term obligations, operational cash generation, and growth investments.
How to Prepare a Cash Flow Statement?
Preparing a statement of cash flows requires a systematic approach. Both direct and indirect methods begin with gathering all necessary financial statements. Utilising a statement of cash flows template can streamline this process, ensuring accuracy and consistency.
These templates are particularly useful for individuals and businesses, providing a structured way to record cash movements from operating, investing, and financing activities. Following a template ensures no details are overlooked, resulting in more reliable financial reporting.
Gathering financial statements
The first step in preparing a cash flow statement is collecting the necessary financial documents, including the income statement and balance sheet. Accurate bookkeeping is essential to ensure that you are using the correct information.
Hiring a bookkeeper or using accounting software can significantly aid in this process, providing a reliable foundation for constructing the cash flow statement. These tools help by maintaining accurate records and automatically generating the required financial data.
Determining the reporting period
Choosing the right reporting period for your balance sheet is crucial as it affects the analysis and interpretation of results. The reporting period can be monthly, quarterly, or annually depending on the business's needs. Make sure to also generate an income statement to provide more insight on your performance.
Combining all sections
Combining net cash flow from operating, financing, and investing activities is your final step in preparing a cash flow statement. Aggregating these sections determines the overall change in cash for the reporting period.
Example of a Cash Flow Statement
Here's a simplified cash flow statement example for a hypothetical small business. This example demonstrates how cash flow statements offer critical insights into financial performance, cash generation capabilities, and cash equivalents:
ABC Company Cash Flow Statement For the Year Ended December 31, 2024
| Category | Amount |
| Cash flows from operating activities | |
| Net income | $50,000 |
| Adjustments for non-cash items: | |
| Depreciation expense | $10,000 |
| Changes in working capital: | |
| Increase in accounts receivable | ($5,000) |
| Decrease in accounts payable | ($2,000) |
| Net cash provided by operating activities | $53,000 |
| Cash flows from investing activities | |
| Purchase of equipment | ($20,000) |
| Net cash used in investment | ($20,000) |
| Cash flows from financing activities | |
| Issuance of common stock | $30,000 |
| Payment of dividends | ($10,000) |
| Net cash provided by financing | $20,000 |
| Net increase in cash and cash equivalents | $53,000 |
| Cash and cash equivalents at the beginning of the year | $15,000 |
| Cash and cash equivalents at the end of the year | $68,000 |
This is a simplified statement of cash flows. Real-world cash flow statements can be more complex and may include additional items. It's always recommended to consult with a financial advisor or accountant for specific guidance.
Analysing Cash Flow Statements
Analysing cash flow statements is essential for evaluating a company’s liquidity and ability to cover expenses and investments. Consistent positive cash flow indicates spending power and growth potential, while a negative cash flow may result from significant investments as well as financial drawbacks.
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Key metrics like the operating cash flow margin and free cash flow also help assess profitability and predict future cash flows. Comparing these metrics against industry benchmarks can provide valuable insights into a company’s performance relative to its peers.
Common Pitfalls in Cash Flow Analysis
Cash flow analysis is a crucial tool for businesses, but it's easy to fall into common pitfalls. Inaccurate forecasting, whether overly optimistic or pessimistic, can lead to misleading predictions. Ignoring unexpected events like economic downturns or supply chain disruptions can also significantly impact cash flow. Poor data quality, such as incorrect sales figures or delayed expense entries, can render the financial analysis unreliable. Additionally, neglecting to review and update cash flow projections regularly can lead to inaccurate forecasts. Businesses with seasonal sales patterns must account for fluctuations in cash flow throughout the year. Businesses can improve their financial planning and make more informed decisions by being mindful of these pitfalls and conducting thorough and regular cash flow analyses.
Summary
In conclusion, cash flow statements are indispensable tools for understanding a company’s financial health. They provide insights into liquidity, efficiency, and the company's ability to generate more money from core activities. By mastering preparing and analyzing cash flow statements, businesses can make informed decisions and plan for sustainable growth.
However, managing these tasks internally can be time-consuming. Osome can streamline your cash flow analysis by ensuring accurate data entry, generating clear reports, and providing valuable insights to help you make informed financial decisions. Contact us to learn more about our bookkeeping services in Singapore!
We hope this guide has equipped you with the knowledge and tools to handle cash flow statements confidently. Remember, a well-maintained statement is not just a financial report but a roadmap to your company’s future success.
From expert guidance and helpful accounting tips to insights on the latest trends in fintech, Heather is here to empower entrepreneurs and small business owners in Singapore with great content. With a background in digital marketing spanning eight years, she has experience writing for various industries and audiences. As Osome’s copywriter, she’s here to inform and inspire our readers with great storytelling.
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FAQ
What is a cash flow statement?
A cash flow statement is a financial report showing a company's cash balance during a designated period. It is a critical tool for assessing a company's liquidity and capacity to fulfil short-term obligations. It differs from an income statement since the latter focuses on company performance.
What are the key components of a cash flow statement?
The key components of a cash flow statement are operating activities, investments, and financing activities. These components collectively provide insight into the cash movements related to a company's core operations, investments, and financing activities.
How does the direct method of calculating cash flow differ from the indirect method?
The direct calculation method provides a clear view of actual cash flow by directly subtracting cash disbursements from cash collections. In contrast, indirect cash flow statements begin with net income and adjust for non-cash items and changes in working capital. Thus, the direct method offers a more detailed breakdown of cash inflows and outflows.
Why are cash flow statements important?
Cash flow statements are essential for evaluating a company's liquidity and financial health, as they provide a clear picture of actual cash movements. This visibility enables stakeholders to make informed decisions regarding the business's stability and operational efficiency.
What are some common pitfalls in cash flow analysis?
Common pitfalls in cash flow analysis include misclassifying a cash flow, neglecting non-cash transactions, and overlooking recurring expenses. These errors can significantly distort financial insights and reporting accuracy.
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