Identifying the Five Key Elements of an Effective Cash Flow Statement

Regardless of the size, type or nature of your business, you will always have a cash flow to take into consideration. Even if you have not experienced any substantial gains, your company will still have a cash flow that will need to be evaluated – even though it might seem to be a one-sided flow. In most cases, though, a company’s cash flow moves in both directions – both in and out of the business. When developing an effective cash flow statement, there are several key elements that must be put in place.

Cash Flow

Preparation, Preparation and Preparation

When it comes to developing a well-structured cash flow statement, being fully prepared is of the utmost importance. Having an accurate and updated balance sheet along with a clear and concise statement of your company’s comprehensive income is essential. This includes a standard profit and loss statement right along with an official report that reflects any applicable comprehensive income as well. You should also have a statement that depicts any recent fluctuations in equity, cash flows recorded in previous reporting periods and also any other type of pertinent information that is directly related to other important material transactions completed by your company during that period of time as well, according to International Financial Reporting Standards (IFRS) Box.

The Differences between Inflow and Outflow

One of the key elements of the standard cash flow statement is the inflow-outflow spectrum. When it comes to inflow, this consists of all of the money that you are able to receive from a wide range of different operations, such as financial loans, approved lines of credit as well as the sales generated from your products and services. Even if you are simply liquidating and selling your assets, the money that is received from those transactions can be classified as inflow.
On the other hand, outflow is considered any cash that heads out from your business – including the funds that are used to pay for various business expenditures, purchases and any payments on your financial loan balances.

Several Important References

When creating your cash flow statement, you need more than just a list of rough estimates and a balance sheet. Keep in mind that your cash flow statement is going to provide you with the core foundation you will need to cover your overhead expenses and other operational costs while effectively and efficiently managing all streams of income and profit at the same time.
Therefore, you are going to need to use current and updated income as well as profit and loss statements in order to accurately calculate projections that apply to your company’s future cash flow trends. Don’t forget to make sure you have the approximate and up-to-date calculations for your available net cash as well, because these figures will become highlights that are featured within your final cash flow statement.

A Four-Part Structure

Another key element of an effective cash flow statement is commonly referred to as a four-part structure of this financial reference. The first section consists of your company’s operating activities, which convert all of the items reported within the income statement to cash from their present state of accrual. The second section focuses on investment activities since the sale and purchasing of long-term assets will be reported within it.

The third section is designed primarily for your financial activities, including the repurchasing and issuance of your company’s stocks and bonds being reported along with its paid dividends. This could also include such things as the purchasing of treasury stock along with the issuance of acquired share capital. The final section of this four-part structure is the supplemental information provided, which is based on any exchange of important items that didn’t necessarily involve any exchange of cash, according to Accounting Coach.

A Completed Balance Sheet

Even though it might seem as if they operate independently, another key element that must be in place when developing your cash flow statement is a finalized balance sheet. This is primarily because of the fact that your cash flow statement will inadvertently function as an effective reconciliation tool when it comes to verifying the cash amounts listed as the beginning and ending figures on your balance sheet. However, without having finished developing an approximate balance sheet, you will not be able to take advantage of this reconciliation opportunity.

Remember, the overall analysis and reconciliation of these accounts is tedious, time-consuming and fairly difficult – especially when dealing with large companies that are publicly traded. Therefore, any effective tool that can be used to increase the efficiency of this overall process is worth considering seriously.