Things To Know About Preparing Cash Flow Statement


Things To Know About Preparing Cash Flow Statement 

A cash flow statement indicates and accounts for the capital inflow and outflow in the business. It gives a clear insight into the company’s capital expenses and is usually prepared at the end of the financial year to show capital utilization in the business. 

Making one can be challenging, especially for start-ups that may not have well-defined accounting departments or full-time accountants. If you have some accounting experience, these guidelines should help remind and guide you on what to do.  

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  1. Accounting for Different Types of Cash 

The sole reason to prepare the cash flow statement is to prove to your investors the capital utilization in your business. You aim to prove that your company is liquid by indicating an inflow and outflow of cash within the firm. Therefore, you should be ready to account for all this cash differently. You can rely on experts or outsource the services of, which specializes in business accounting services. These expert services are crucial for start-ups, especially those moving to new markets and looking for expert help to prepare financial statements. 

  • Account for Inflows and Outflows 

These are the capital flowing into the firm; they can be from activities such as investment returns, revenues, payments for services rendered, equity, loan, etc. you must account for all of it. The next is the cash due to outflow activities which is the cash flowing out of business into an investment, supplier payments, wages, and rental expenses. In short, these are the primary organization expenses and capital inflow activities. 

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  • Cash Due to Operating Activities: 

These are the capital expenses to support the organization’s operations. They include payment to support manufacturing, acquire raw materials, pay for services etc. They account for how the company generates its cash in the forms of expenses to generate revenue and the revenues themselves: they include 

  • Receipts from the sale of goods 
  • Interests payments 
  • Income tax payments 
  • Supplier and raw materials payments 
  • Salaries and wages 
  • Sale of loans and equity.  
  • Rent and utilities, and other operating expenses.  
  • Cash from Investing Activities 

You need to account for the capital from investment activities which can also account for how much you invest into the firm’s assets. Remember, assets improve the company’s position in the balance sheet and asset column. Therefore, you need to account for the cash spent on building, machines, equipment, vehicles, and other short-term assets. This column can also help you when dealing with stakeholders such as banks that may offer you loans based on the assets available and how much they can be used as collateral. 

  • Cash from Financing Activities 

This collum will cover the cash from potential investors; you need it to prove to prospective investors that they are not the only ones investing in your firm and that there are also others already investing. The second form of investment is the cash form loan activities, the loan acquired for business operations from the banks. 

After accounting for the cash investment inflow, you need to account for the benefits the shareholders gain, include the dividends paid to the shareholders annually, and show the loan repayments in the form of the principal loan and the bond interest repayments. These activities show the company’s capability to service its liabilities and higher revenue and profitability.  

2. Data and Documentation 

Accounting for the cash flow activities can sometimes be hectic; hence you must have all the required documents and data. Remember, false or cooked information is a financial crime, and you do not want to lie to potential investors because some are smart enough to see lies in financial statements. 

Therefore, the first process while preparing all the cash flow statements and columns is to have all the relevant documents. You do not need individual receipts and smaller payment vouchers. Other financial statements will help you create a good cash flow statement. You need to have the balance sheet, cash and bank account ledgers, memorandum of contracts, data from all shareholder meetings etc. 

These statements will help you account for specific financial activities with capabilities to alter financial outflow or inflow. They also help you to account for the exact values rather than an approximation.  

  1. The Impact of Balance Sheet 

The balance sheet should be the first financial statement you prepare or have before you create the cash flow statement. The statements account for all your assets and liabilities; in short, they can help you track all your incomes and expenses. It also helps you account for the equity; therefore, it contributes directly to all three components of the cash flow statement.  

Once the balance sheet is fully prepared and well-balanced, you can copy and paste the statements and values to the relevant columns in the cash flow statement. Alternatively, link the two statements so that any changes will be reflected on the cash flow statements. 

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When to Prepare your Cashflow Statement? 

The preparation of cash flow may not require much time as long as you have all the relevant data and documents to prepare the documents. Within the company accounting cycle, it should be the last document you prepare by the end of the financial year. However, a last-minute hurry can lead to unforeseen errors; hence, you must begin early. 

Good accounts and expert consultants will always advise on a link to the balance sheet to the statement of cash flow. Since you update the balance sheet frequently, it is possible for the financial cash flow also to update daily. This process requires expert help but helps you save a lot of time. 

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The cash flow statement is critical for investors to understand how they spend and make cash. It is also critical for them to understand your capital sources and the benefits of their investments; hence you need to spend quality time generating one guided by all the principles. You can hire an expert to help generate the best and most accurate statement.  


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