As an entrepreneur, you must know the importance of a company’s financial statements, which include the cash flow statement, which is considered an essential tool for understanding the financial health and performance of companies. It is a map that shows how money moves in and out of a company over time, which helps analyze how the company manages cash and directs future investments more effectively.
In this article, we will explore the explanation of the cash flow statement and its importance as a vital tool for improving company performance and making sound financial decisions. We will also explore its main components, its role in analyzing the company’s financial situation, and how to prepare it carefully and accurately. Follow with us on our journey in the world of the cash flow statement to understand how it can successfully and confidently determine the future of financial business.
What is a statement of cash flows?
A cash flow statement is a financial report that summarizes the cash flow to and from a company, including cash flowing from operating activities, financing activities, and investing activities. A cash flow statement is used to track and record the outgoing and incoming cash movements of a particular company or project over a certain period of time. It is considered an important part of a company’s financial reports. But what are cash flows? It is the movement of cash within the company during the specified period. It is tracked to understand how cash is generated and used effectively in achieving the company’s financial goals.
The importance of the cash flow statement
A company’s cash flow statement provides a comprehensive view of the movement of cash within the company over a specific period of time and how the company manages cash. Its importance is as follows:
- It provides a comprehensive view of the movement of money entering and exiting the company over a certain period of time.
- The statement of cash flows helps users of financial statements evaluate a company’s financial liquidity, evaluate its ability to finance its operations, and assume current financial obligations.
- It helps to make informed financial decisions based on the analysis of money movement and financial liquidity expectations.
- It helps monitor the company’s financial performance by comparing expected cash flows with actual flows.
- It contributes to the effective planning and management of the company’s financial resources, including allocating cash for various activities and developing growth and expansion strategies.
Components of the cash flow statement
The cash flow statement consists of three main components that together show the movement of cash within a company over a specific period of time. Income and expenses are components of each department. Each offers a different vision of how the company does business. Here’s a detailed explanation:
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Cash flows from operating activities
It refers to the movement of cash that arises as a result of a company’s main activities, including cash generated from sales of products or services, cash received from collecting debts or loans, and cash paid to cover operational costs such as employee salaries, raw material costs, and rents.
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Cash flows from financing activities
Reflects cash flows related to obtaining or returning resources from owners, such as financing or loans from lenders or repaying these loans to them. Cash flows from financing activities also include money received from issuing bonds.
3. Cash flows from investing activities
It relates to the movement of money resulting from investment activities and includes buying and selling long-term assets, making and collecting loans, and investing in other financial assets such as stocks and bonds.
How do I prepare a cash flow statement?
Preparing a cash flow statement is an essential process for any company, as it helps in analyzing financial liquidity and making sound financial decisions. Here’s a detailed explanation of how to prepare a cash flow statement:
1. Determine the time period.
Preparing the list begins by specifying the required time period, whether monthly, quarterly, annual, or any other period appropriate to the company’s needs. Determining the appropriate time period helps in analyzing the company’s performance over time and understanding cash flow trends.
2. Determine the setup method.
The cash flow statement can be prepared in a direct or indirect way depending on the company’s preferences and needs, and both provide the same final result but with a different method of analysis. Here’s the explanation:
- Direct method: It depends on analyzing the actual cash amounts flowing to and from the company. This method gives a direct and clear view of the sources and uses of cash.
- The indirect method: The indirect method depends on the analysis of other accounting data to estimate cash flows, such as income and expenses, which requires focusing on changes in some items in the income statement to calculate cash flows.
3. Collect financial data.
The financial data necessary to prepare a cash flow statement is collected and includes financial statements such as the income statement, balance sheet, and other financial data such as a list of debtors and creditors and other financial reports. Any changes in the cash account are determined after they are calculated from the balance sheet. The account must reflect the actual amount of cash coming in and out of the company during the specified period.
4: Calculate the components of a cash flow statement.
Cash flow components such as change in equity and net flow are calculated using the opening balance for the period specified on the balance sheet. The net cash flow can be calculated to understand the amount of money the company obtained in the period specified by the calculation process: (cash inflows minus cash outflows). These accounts help understand the company’s financial position by preparing a comprehensive list of cash flows.
5: Estimating the change in cash
The change in cash between the beginning and the end of the period is estimated by adding the cash available at the beginning of the period to the cash received during the period and subtracting the cash used during the period. This change in cash represents the company’s net cash flow during the period. For example, if the company’s opening balance is 50 thousand riyals and at the end of the period it has debts of 50 thousand riyals, the cash account is 0, which means that the company did not make any profits during the specified period.
6. Analyze the data and prepare the list.
After collecting and classifying data and estimating the change in cash, this data is analyzed to understand the company’s performance and cash management policy. The final cash flow statement is then prepared and reviewed to ensure its accuracy and validity.
The difference between the cash flow statement and the statement of financial position
After explaining the statement of cash flows in detail, here is the difference between it and the statement of financial position:
| Cash flow statement | Statement of financial position |
| It focuses on the movement of cash in the company over a certain period of time. | It reflects a company’s financial position at a particular point in time. |
| Its components include cash flows from operating, financing, and investing activities. | The components of the statement of financial position include assets, liabilities, and equity. |
How does Qoyod make it easier for you to prepare a cash flow statement?
Qoyod system plays; The best accounting program in Saudi Arabia plays a crucial role in the process of preparing the cash flow statement accurately and effectively. This smart digital tool allows companies to record and track all cash flows easily and accurately. Qoyod creates a cash flow statement that shows the cash impact of all incoming and outgoing activities undertaken by the facility during the financial period.
Qoyod also divides cash flows into activities that have a common nature to help identify strengths and weaknesses in terms of the facility’s ability to generate cash that will be used to pay obligations, finance operations, and distribute profits.
Qoyod shows the result of the cash flow statement through the following:
- Determine the net cash flow for each activity.
- Determine the net cash flows for the period by summing the net cash flows for each activity.
- Determine the net cash flow at the end of the period by summing the net cash flow at the beginning of the period plus the net cash flow for the period.
- Ensure that the net cash flow at the end of the period is equal to the net cash appearing on the balance sheet at the end of the period.
Qoyod also provides the ability to analyze the cash flow statement, such as the financial position and income statement, based on the type of liquidation or based on a specific branch or several branches. Qoyod provides the ability to export the cash flow list to PDF or Excel.
Conclusion
The cash flow statement is a vital tool used to classify and analyze a company’s cash flows from operating, investing, and financing activities. It enables business owners to evaluate the company’s financial health, improve cash management, and make sound financial decisions. The cash flow statement must be accurate and comprehensive, which requires accuracy in recording cash flows.
The Qoyod system stands out here thanks to its endless accuracy and ease of use. You can enjoy all the professional accounting services at affordable prices, and you can also try them for free for 14 days without a credit card. Do not hesitate and sign up with the Qoyod accounting system today.
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