Understanding the basic Cash flow Statement

What The Components of a Cash Flow Statement Represent

The importance of the cash flow statement is underscored by the fact that it is one of the key financial statements statutorily required to be included in the published annual report and accounts of public limited companies. The other two are the balance sheet and the profit and loss account.

As a business management tool, the cash flow statement is designed to track the inflow of cash into the business and the utilisation of such cash. What this brings into clear relief is the liquidity profile of the business, usually on periodic basis. It is thus possible to see if the business is generating enough cash flow, from period to period, to meet commitments and ensure stable operation.

A projected cash flow statement, is an important business planning tool, providing a cash flow analysis for a future period. It relates expected cash inflows to expected outflows, again highlighting points of stress or abundance, and allowing for a proactive tweaking of business activities.

Cash Flow As Different From Accrued Revenue Or Expense
A cash flow statement tracks cash flow, meaning the actual receipt or disbursement of money. This is not synonymous with sales revenue in the case of inflow or incurrence of expense, in the case of outflow. If sales revenue has not been collected, cash inflow is unaffected by it. If, for instance, total sales is N5million but only 50% is paid for while the balance is due in 60 days, the current cash inflow is N2.5million. This is what is reflected in the cash flow statement as receipt from sales. Similarly, if you buy a motor vehicle for N2million, to be paid for in four equal monthly installments, the effect on cash flow will be a monthly outflow of N500,000, for the four months.

The cash flow statement therefore deals with the timing of the receipt and payment of money. It emphasises the point that actual cash collection is critical for business survival. Just as generating sales is critical for the survival of a business, such sales must be ultimately received as cash, to make meaning. The timing of this receipt is also vital, as the earlier, the better. If cash collection is unduly delayed, it could hurt or kill the business.

Cash outflows are also as critical. If outflows are unrestrained or ill-timed the business could become cash-strapped and unable to operate.

Structure Of The Cash Flow Statement
The cash flow statement covers a given period, which could indeed be a day, month, etc. It could be for a past period, dealing with actual figures or for a future period, based on projections. The latter is an important tool for proactive liquidity management.

The cash flow statement has five principal lines of information: the opening cash balance (i.e. the sum of physical cash balance and balances in the bank), total cash inflow in the period of the cash flow statement, total available cash (the sum of the first two lines), total cash outflow and closing cash balance (after netting off total outflow from total cash total cash available. The constructed statement will have the following outline:

Cash flow statement for the period April to June, year x:

This is a simplification but it captures the essence. 'Total cash flow', for instance, is the sum of several lines of cash inflow items, for example, proceeds of cash sales, collections from debtors, interest received, etc. Similarly, 'total cash outflow' is likely to consist of several items e.g. payment for stock purchases, salaries and expenses paid, due accounts settled, etc. The 'closing cash balance' for each period will be the 'opening cash balance' for the next period. The closing cash balance may be negative, implying that funding must be sourced to meet the projected outflows for that period, or some measures taken to improve inflows or reduce outflows. On the contrary, a positive balance may indicate excess operating cash that needs to be profitably invested.

A cash flow statement is therefore not a complicated statement to prepare. If you use this tool properly, your cash management will be under reasonable control, safeguarding the financial health of the business.