A cash flow statement is an important financial document that allows you to see how cash moves in and out of a business. Cash flow statements show the cash generated and used during a specific period, such as a quarter or a year. It helps businesses see their financial health and cash flow clearly.

Understanding the components of a cash flow statement

A cash flow statement is divided into three main sections: operating activities, investing activities, and financing activities.

Operating activities

Operating activities include the cash coming in and going out from daily business operations. This section starts with net income and adjusts for changes in items like accounts receivable, inventory, and accounts payable. Tools like Bookipi can help simplify this process by offering features to track revenue and expenses, making it easier to monitor cash flow.

Revenue and expenses: This shows the cash made from sales and the cash spent on operating costs.
Net income: The profit or loss from the business’s operations.
Depreciation and amortization: Non-cash expenses added back to net income because they don’t involve actual cash.
Changes in working capital: Adjustments for changes in assets and liabilities like inventory, accounts payable, and accounts receivable.

Investing activities

Investing activities show cash flows from buying or selling long-term assets and investments.

Capital expenditures: Cash spent on buying property, plant, and equipment.
Asset sales: Cash received from selling long-term assets like equipment or real estate.
Investments: Cash used for buying and selling investment securities.

Bookipi’s reporting features can help you keep track of these transactions, providing a clear picture of your investments.

Financing activities

Financing activities include cash flows from borrowing money, repaying debt, and raising capital.

Long-term and short-term debt: Cash coming in from issuing debt and going out from repaying it.
Stockholders’ equity: Cash coming in from issuing stock and going out from buying back shares.
Dividends: Cash paid to shareholders as dividends.
Deferred revenue: Cash received before delivering goods or services.
Interest expense: Cash paid for interest on debt.
Income taxes: Cash paid for income taxes.

Bookipi can simplify managing these transactions, making it easier to track debt repayments and equity financing.

Direct vs. indirect method of preparing a cash flow statement

There are two methods for preparing the operating activities section of a cash flow statement: the direct method and the indirect method.

Direct method statement of cash flows

The direct cash flow statement shows exactly how much cash comes in and goes out from day-to-day business activities, like cash received from customers and payments made to suppliers. It gives a straightforward picture of cash transactions.

Indirect method statement of cash flows

The indirect method starts with net income and adjusts for non-cash transactions and changes in working capital. It is more commonly used because it links the cash flow statement to the income statement and balance sheet.

Pros and cons

Direct method: Offers detailed information but can be time-consuming to prepare. Bookipi’s automation can help streamline this process.
Indirect method: Easier to prepare and more widely used but less detailed. Bookipi’s features can make this process more efficient.

Importance and benefits of a cash flow statement

A cash flow statement is important for several reasons:

Liquidity and solvency: Checks if a company can pay off its short-term debts in time, which indicates financial stability in the short term.
Financial health: Measures overall financial stability, considering profitability, asset management, and debt levels.
Cash flow patterns: Shows trends in cash movements over time, reflecting how well cash is managed.
Financial obligations: Assesses the ability to pay debts and other financial commitments on time.
Growth opportunities: Evaluates the capacity to invest in new projects and expand operations for future profitability.

How to read and interpret a cash flow statement

To understand a cash flow statement, focus on these three sections:

Operating activities: Analyze trends in net income and adjustments for non-cash items.
Investing activities: Note major purchases or sales of assets.
Financing activities: Observe changes in debt and equity financing.

Consider the relationship between net income and cash flows: Net income includes non-cash items, so adjusting for these is important to understand actual cash flow. Tools like Bookipi’s reports provide clear insights into these relationships, making interpretation easier.

Using ratios and metrics: Evaluate performance using metrics like operating cash flow to net income ratio.