The statement of cash flows, commonly referred to as the cash flow statement, reports the movement of cash and cash equivalents within a business over a defined reporting period.
The report details all cash receipts and payments across key activity categories, presenting the net increase or decrease in cash for each area. These movements are then combined with the opening cash balance to determine the closing cash position for the period.
Together with the profit and loss statement and the balance sheet, the cash flow statement forms a core component of a business’s financial reporting framework and provides important insights into financial performance.
Understanding the Cash Flow Statement
The statement of cash flows links information from the profit and loss statement and the balance sheet to explain how the business’s reported profit translates into actual cash movement.
While most financial statements are prepared on an accrual accounting basis, the cash flow statement is prepared on a cash basis. This requires adjustments to accrual profit to reflect changes in asset and liability balances that impact cash.
Key Reporting Sections
Cash flow statements are generally divided into three main categories:
- Operating Activities: Cash generated or used in day-to-day business operations, including customer receipts and payments for expenses.
- Investing Activities: Cash movements relating to long-term investments and capital assets, such as property, plant and equipment.
- Financing Activities: Transactions affecting the business’s funding structure, including loans, equity contributions and dividend payments.
Notes to the Financial Statements
Financial report packages typically include supporting notes to the financial statements. These notes provide additional explanation of significant transactions, non-cash activities and detailed breakdowns of summary figures contained within the primary reports.
They may also include disclosures relating to taxation, employee provisions, risk management practices and related-party transactions.
The Value of the Cash Flow Statement
The statement of cash flows provides a practical view of how effectively a business generates and manages cash.
It helps answer important questions such as:
- Is the business generating sufficient cash to meet its obligations?
- Which areas of the business generate the strongest cash flow?
- How does net profit translate into operating cash?
- What does the cash flow trend indicate about future performance?
Understanding your cash flow position is critical to effective business management and financial planning. If you would like assistance reviewing your financial statements and assessing your cash flow outlook, we would be pleased to assist.
