What is a cashflow statement and why is it important?

What is a cashflow statement and why is it important for a business?

Have you ever wondered what is a Cashflow Statement and why it’s important to a business?  Well in this video we are going to answer that and explain why!!!

Hi, I’m Kim Marlor from Krystal-clear Accounting.  We often get asked by business owners what is a Cashflow statement and why it is important for a business.  So, in this video, we are going to explain the technical elements of what a cash flow statement contains and why business owners need to understand them and some ideas on what they can do to improve their cash position!

In truth, a cash flow statement is all about understanding where THE CASH has come into the business from and where it’s gone out of the business i.e., what it has been spent on….and whether it is net cash positive or negative……

A lot of business owners go into business without any planning and sadly don’t really know with certainty on a monthly basis, whether they are profitable or not.  They manage their business by looking at the bank balance but don’t really understand their numbers or the implications of the decisions they make on cash.

They don’t understand that the Profit and Loss of their business is very different to the actual cash position.  A profitable business on paper can still burn through cash and run out of money and fail…. which is why it is important to understand whether your business has more cash coming in (cash INFLOW) or more cash going out (Net cash OUTFLOW) and then do something about it quickly!

A cash flow statement is broken into three sections.

The first section is cash from operating activities.

The second is cash flow from investing activities.

And finally, the third is cash from financing activities

Let’s look at each of these in turn.

Operating Activities

Arguably, the most important section.  This is due to it reflecting the underlying trading of the business and whether your business model works or doesn’t! 

Is the business inherently generating cash or is it losing cash? Whilst in the short term you can remain in business if you are haemorrhaging cash, you can’t long term! You need excess cash for profits and even in the short term, you need cash to pay the bills.

 Operating activities are broken down into two sections – cash coming in. So, this is typically going to be from your customers when they pay your invoices.

And the flip side is cash going out to pay your suppliers and all the other costs of running cost your business.

So, you’ve got, the cost of sales – costs of any raw materials you buy to make your product or costs directly associated with producing your service, that may include some staff and marketing cost.  Then you have all the overheads, the general costs of running the business, like admin costs, premises, insurance costs etc to name but a few.

Let’s not forget paying the taxman as these are all included in operating activities.

The net figure of all the ins minus the outs is super important.  It may sound obvious, but you need a net positive number.  If it is consistently negative, then the business is inherently losing money and you will at some point run out of money. So, you then need to take steps to stem the outflow of cash.

The second section is cashflow from Investing activities

So, this is where you account for the cash from buying property, plant and equipment like for example, machinery/ vans, that you need to run the day-to-day operations of your business and to grow it! These tend to be lumpy purchases and are not usually part of the normal day to day, and hence do not form part of operating activities

Most businesses don’t generally buy property, plant & equipment, every week, or month, it’s a little more sporadic.  It also tends to be bigger amounts as a general rule.  Also, in this section, you account for any disposals of property, plant & equipment so any money you get back from selling them.

The third section is Cashflow from financing activities

So, this is where you would account for monies coming into or going out of the business.  So, for example, if you apply for a loan and you receive money in from a bank or other borrowing facility.  Or repaying a facility.

You may have received money in from say funding circle as a lump sum and now may be making repayments against the loan.

You may have even bought a piece of equipment on HP or a lease and now you have to repay the money and interest. 

Or it could be a case of paying out dividends to shareholders or interest paid on loans. 

The operating Activities need to be positive, as it needs to fund the investing and financing activities of the business

This is why some business comes unstuck……they grow very quickly and buy a lot of equipment without realising the impact on cash flow and then run out of cash.  This is because the operating activities, in the underlying business, are not yet generating enough cash to pay for the equipment itself. They can sometimes struggle to meet the loan repayments as they fall due. 

So, what can you do about this …?

It is really important to plan in your business and especially plan your cash requirements.  This is so you know what you are wanting to do in the next 12 months, and you can see the implications on your cash flow.  This enables you to then borrow enough cash and know what the business needs to deliver in terms of sales down to profit in order to service those purchases/loans and the growth.

This way you can monitor monthly against not only your management information but your cash flow so you know everything is under control and going according to plan.  You should have early warning alerts in place if this goes awry so you can do something about it before it’s too late.

Most businesses can manage for a short while with more cash leaving the business then coming in, but not long term. 

So what do you do if this is the case….well you need to look at the profitability of your products and services and a good entrepreneurial accountant should be able to help you with this.  Putting your prices up is definitely somewhere to start, most business owners haven’t put their prices up in the last year!  This will immediately mean cash flows into the business quickly with no additional outlay!

You should also look at how much cash is tied up in stock, how often is that stock turning over and being sold or is the stock obsolete or rarely sold, in which case maybe it’s time to have a clear out and release some stock!

I’d also recommend you look at how much cash is tied up in your debtors – i.e your customers who owe you money.  Have you reviewed your terms and conditions recently, do you get your customers to pay you on time?  I.e if your terms are 30 days but customers only pay you on 60 days…you are missing out on this money and it could be better used to fund your working capital!!

If you’d like to have a chat over a coffee (Virtually or face to face) and to see what is possible, all you need to do is call me or one of my team on 0161 410 0020 or email wecare@krystal-clear.co.uk

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