Cash flow is the lifeblood of any business. Without it, companies cannot have the cash on hand to pay their staff and suppliers, launch marketing campaigns or power growth – and this is particularly true of expanding businesses, who need to invest in stock and people before being paid by their new customers.
To know exactly where you are with regard to your cash flow, you need to compile cash flow statements – whether monthly, quarterly or annual. Large businesses tend to go for the latter option, whilst for SMEs greater frequency is advised in order to avoid any unpleasant surprises.
So what exactly is a cash flow statement? In simple terms, it’s a document that tells you how much cash you have coming in and how much going out. The statement will indicate your level of liquidity and predict your financial situation in the near future. You or your accountant can use it to ensure that you can pay your bills, your creditors can examine them to see whether you will be able to repay borrowing, and investors may examine them before buying equity.
In general, a cash flow statement will bring together three key elements:
1 Information on your operating activities
Cash inflows occur when customers pay for your products and services (which can be many weeks or even months after ordering them) and outflows occur when you pay your people, suppliers, taxes and interest charges.
2 Information on your investments
You also need to factor in sales or purchases of property, equipment and other key assets, as well as money dedicated to mergers or acquisitions.
3 Information on your finances
In this section of the statement, you will include business loans for property or equipment, share issues to employees and dividend payments to shareholders.
There are two ways of preparing the cash flow statement: direct and indirect. Each has its advantages and drawbacks.
The direct method of preparing a cash flow statement
If you choose the direct method, your cash flow will show cash received and paid, rather than net income or losses as shown on your income statement. The key difference from the indirect method will thus be found in the operating activities section, with the investment and financial sections being identical. This approach delivers a more complete picture of your business’s financial health.
The indirect method of preparing a cash flow statement
If you choose the indirect method, the operating section begins with net income from your income statement. You then adjust this figure for non-cash items such as depreciation, as well as for any gains and losses relating to the sale of assets. These gains or losses represent the difference between the assets’ net book values (cost less accumulated depreciation) and the actual sale price – not the amount you actually received.
This approach can be easier as you can readily gather the basic figures from your accounts and other statements. As a result, most large companies favour the indirect approach.
How Cashsolv can help
Of course, even with carefully prepared cash flow statements you can encounter the occasional unexpected problem. Cashsolv can help with an emergency business loan, and can have the cash inside your account in under 24 hours. Alternatively, to tame a troublesome cash flow on an ongoing basis, you could consider invoice finance. This option enables you to borrow up to 85% of the value of your invoices as soon as you issue them, with repayment being made when your customers pay you. If you wish, we can even take over your debtor ledger and assign our experienced credit control professionals to secure early repayment, thus minimising the interest you will have to pay.
To learn more, please visit our business finance page.