Everything you need to know about the Statement of Cash Flows
Do you know what a Statement of Cash Flows is?
I've heard many people feel that this statement is the most important of the 3 financial statements...
and I can totally understand why
➡ What is the Statement of Cash flows?
This statement shows you all of the details that makes up the MOVEMENTS in your CASH BALANCE on the Balance Sheet.
It is one of 3 of the Financial Statements - the others being your Income Statement, and Balance Sheet
➡ Why is the Statement of Cash flows important?
While the answer here is subjective, it brings about an important point - your CASH is KING.
It can add a lot of value tracking exactly how this is moving, in addition to all the other financial metrics to track in your company
➡ How do you compile the Statement of Cash Flows?
1️⃣ the INDIRECT method
This method is calculated easily by taking your
➕ adding back your Depreciation & Amortization
➕ adding back the difference between each of your balance sheet account
This method is the most common method used because of it's simplicity in creating
The challenge though, is that it can be tough to understand for someone without a Finance & Accounting background (which is most business owners)
2️⃣ The DIRECT METHOD
Here, the information is presented in a much more legible format..
Common lines you'll see here are:
- Cash received from Customers
- Cash paid to vendors
- Cash proceeds from line of credit
But the challenge is the ease of producing, as you wouldn't be able to do so with only the data found on your Income Statement and Balance Sheet
Unfortunately, many accounting software's also don't give you the ability to prepare this report...though I have seen some that do
➡ What are the sections of the Statement of Cash Flows?
It is comprised of 3 sections
⚫ CASH FROM OPERATING ACTIVITIES
This section shows all of the cash flows from activities related to operating the business
⚫ CASH FROM INVESTING ACTIVITIES
Here you show the cash movements from long term assets that are purchased that will be depreciated over time.
⚫ CASH FROM FINANCING ACTIVITIES
Here you show the cash from all equity investments and debt injected / paid out from the company
This is all just a high level overview of the Statement of Cash Flows...there's a lot more to the topic