Cash Flow StatementSIMPLIFIED!

Tolu AGUNBIADE19 March 2015

1. What a cash flow statement is

2. How to prepare a Cash Flow Statement

3. What Your Cash Flow Statement says about your business

Today, we’ll learn:

What is a Cash Flow Statement?

…and what is it used for?

Simply put, a cash flow statement is the

movement of money in and out of your business.

A cash flow statement can answer the questions:

‘Where did the money come from?’and

‘Where did it go?’

The primary purpose is to provide information

regarding a company’s cash receipts and cash payments

It can be used to assess the timing, amount and predictability of future

cash flow.

How is the Cash Flow Statement Different from The Other Financial Statements?

The Cash Flow Statement complements the income

statement and Balance Sheet.

It is designed to convert the accrual basis of accounting

used in the income statement and balance sheet back to a

cash basis.

While the income statement tells you if you are making a profit or a loss and

by how much.

The Balance Sheet tells you what you

own, what you owe and who you’ve gotten

money from.

They are both prepared on accrual basis.

The Cash Flow statement is the one financial statement prepared strictly on a cash basis and lets you know how much

liquid cash your company is making.

“As the number of corporate failures has risen, there is one line that bankers continue to echo: it is not a fall in profits

that leads to failure, but a lack of cash.”

Source: The Financial Times

“In too many situations, companies and their investors have been focused on profits, but in an environment where

liquidity is tight and confidence thin, cash is king.”

Source: The Financial Times

What Makes Up aCash Flow Statement?

Part 1: Operating Activities

Operating activities in cash flow arise from normal

business operations such as revenues and cash operating

expenses after taxes.

Operating activities that create cash outflows include payments

by suppliers, payment to employees, interest payments, and payment of income taxes.

Cash inflow (+)• Payment for services rendered• Payment from customers

Cash outflow (-)• Payments to suppliers• Payments to employees• Payments to government• Payments to lenders• Payments for other expenses

Part 2: Investing Activities

Investing activities involve buying and

selling of current and fixed assets.

Cash inflow (+)• Sale of property, plant and equipment• Sale of debt or equity securities (other

entities)• Collection of principal on loans to other

entities

Cash outflow (-)• Purchase of property, plant and

equipment• Purchase of debt or equity securities

(other entities)• Lending to other entities

Part 3: Financing Activities

Financing activities include borrowing and repaying

money, issuing stock (equity) and paying dividends

For example: If you borrow funds to purchase equipment or pay off a loan, the cash flow statement will

enable you to determine how much cash was either generated or used as

a result of those transactions

How to Prepare a Cash Flow Statement

1. There will be a starting balance of cash at the beginning of each period

2. You will have increases or decreases in cash via operations; the company made or lost money on the core business

3. The company will use cash throughout the year to pay for things i.e. new assets

4. Some companies may choose to raise additional cash throughout the year

+ Cash Flows from Operating Activities

+ Cash Flows from Investing Activities

+ Cash Flows from Financing Activities

= Increase OR Decrease in Cash (Ending)

+ Beginning Cash Balance

= Ending Cash Balance

How to Analyze a Cash Flow Statement

When analyzing cash flow, the first place to look is the cash flow for operating activities

A large increase in use in cash may be positive as it indicates a large booking or deal has occurred for

which payment is expected

A lack of investing activities, which is few purchases of new equipment or other assets, may

indicate stagnant growth.

As a company expands, financing activities will become increasingly important.

It will tell outsiders how the company has grown and the

financial strategies of management.

What do you do when you have a

negative cash flow?

Make an effort to increase sales!

Try and collect payment from customers more quickly. This can help

you avoid long gaps and avoid transactions dragging on.

Attempt to reduce monthly expenditure. Buy supplies in bulk to get a discount, buy from a more competitively priced supplier,

rent smaller premises, switch utility companies to reduce monthly outgoings –

anything!

Thank You