“Many small businesses would rather face an angry barbarian horde than tackle their cash flow statement.”
The Balance Sheet and the Profit and Loss Statement work in relation to each other to show the cash flow statement, which is the movement of cash in your business. Allow the Business Mentor UK to explain this further!
A Cash Flow Statement is NOT always included with the statutory accounts that the Accountant prepares at the end of the financial year. It is an essential part of any management accounts reports you should ask your accountant for.
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As your business grows, getting clarity on your numbers on a regular basis becomes critical to your decision making. But remember the Cash Flow Statement, like all the other Financial Statements, is backward looking. Putting together a Cash Flow Statement is an essential part of managing your business.
The cash flow statement is:
- Net Profit,
- Adding back any non-cash items that were in the profit and loss such as depreciation;
- Taking off any capital expenses that have been incurred such as any purchase of fixed assets and;
- Recognising the change in working capital.
In recognising how many debtors have paid us and how many suppliers we have paid and any tax payments that have been made, our closing cash figure which will be shown on the balance sheet as the balance of cash, either as an asset with cash reserves or as a liability if there is an overdraft.
The cash statement shows you what you’ve spent your cash on and where you’ve generated your cash from in the past. It can be broken down into a more detailed analysis so that you can clearly identify, for example, profitable parts of the business especially if your business has a diverse offering.
Where working capital has increased, there is MORE cash tied up in stock, debtor and creditors – the cash flow statement reflects this by reducing the cash balance by the net effect of the movement.
If the working capital decreases, there is LESS cash tied up in the running of the business. This is a trend worth following as it allows you to spot when the business is increasing its working capital, which can quickly reduce your ability to pay your liabilities on time.
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