Skip to content

What is a cashflow statement and why is it important?

Do you know the answer to the question ‘What is a cashflow statement?’ 

More importantly do you know why it is so important for a business? 

In this video Kim will answer these two important questions…

If you’d like some help when it comes to understanding your cashflow statement give us a call on 0161 410 0020 or ping us an email to [email protected]

 

If you’d like some help when it comes to your business and its financial statements then click here…

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 [email protected]

Hope that helped. Please subscribe to our YouTube channel so you don’t miss any of the content we release.  Feel free to hit like and share,  thanks for watching.

It is important that you take professional advice before making any decisions based on the information that you learnt here. While every effort has been made to make sure it is accurate it cannot be precisely tailored to your personal circumstances. This article is for general information only and no action should be taken, or refrained from, as a result of this information.  Professional advice should be taken based on specific circumstances in each individual case.  Whilst we endeavour to ensure that the information contained in the article is correct, no liability will be accepted by Krystal Clear Accounting which is a trading name of Kim Marlor Associates Ltd or damages of any kind arising from the contents of this communication, or for any action, inaction or decision taken as a result of using any such information.

What are Bank Feeds and how do they work?

Related Articles

[related_posts_grid]

In short, bank feeds create a digital link between your business bank account and your accounting software, such as Xero or QuickBooks.  

This means bank transactions are automatically downloaded into the accounting software. This simple piece of automation, completely removes the need to manually input every bank receipt and payment into the accounting software. 

Having bank feeds in place, saves a HUGE amount of time bookkeeping. That’s because it completely removes the need to manually input bank transactions into the accounting software. 

Saving time bookkeeping isn’t the only benefit for the business…. 

 

 

What is a Cashflow statement and why is it important?

What are the main benefits to a business using bank feeds?

Bank feeds automate, what was previously, a time-consuming task of entering all the bank transactions into the accounting software. 

 This saves the business a HUGE amount of time (& money) spent on bookkeeping.  

With bank transactions being downloaded from the bank every day, it means it’s quicker and easier to keep the bank balance in the accounting software up-to date. 

With the accounting software up-to date, the bank is updated daily which gives you a clearer, real-time view of your business’s cash flow.  

This makes it easier for you to plan your cashflow, and take action to improve it. 

There is always the risk of errors being made when data is being manually inputted into the accounting system. It is often time-consuming to find and correct any errors. Also, if an error is large then the Profit & loss and Balance Sheet reports will be inaccurate and potentially misleading. 

 Automating the bank transaction entry previously manual process, reduces the risk of errors being made and ensures that the bookkeeping records and reports are accurate. 

How to Link Your Bank to Xero

Ensure that your bank account is set up for online banking. This feature is typically available from all major banks. 

Log into your Xero account and navigate to the banking section. Select ‘Add Bank Account’ and follow the prompts to search for your bank. 

After adding your bank account details, you’ll see an option to set up bank feeds. Click ‘Agree’ to the terms, then securely log into your online banking portal through Xero to authorize the connection. 

 

Are Bank Feeds Safe & Secure?

Yes. 

Firstly, having bank feeds in place ONLY means bank transactions are downloaded into the accounting system. They do NOT give anyone else access to the business bank account. 

 Secondly, XERO has various security measures in place to give you a piece of mind that your financial data is safe and secure: 

 

  • Encrypted Connections: Xero uses advanced encryption technology to secure the data transmission from your bank to Xero. This means your sensitive information is encrypted during transit and cannot be intercepted or read by unauthorized parties. 

 

  • Compliance and Standards: Xero adheres to high standards of data security compliance, thus ensuring that its practices meet or exceed industry security standards and regulations. 

 

  • Regular Renewals: To maintain a high level of security, XERO requires that the bank feed connection is renewed every 90 days. This process is straightforward and helps ensure that the integrity of your financial data is always protected. 

 

people are connected
KIm Marlor the MD of Krystal Clear Accounting
krystal clear accounting

In Summary

In short, having bank feeds really saves businesses time and money on their bookkeeping.  

 They automate and eliminate what is otherwise a time consuming and error prone manual process.  

 Bank feeds is just one of the ways technology can be used to help business owners improve the financial side of their business.

Request a Call Back: