How to Create Cash Flow Reports

Before they can start preparing a cash flow statement, a person who wishes to do so must first understand what exactly a cash flow statement is.

So, the question they need to ask first is,” What is a cash flow statement?”. The answer to this question is a very straightforward and to-the-point answer. A cash flow statement is basically a financial report that is responsible for detailing how cash enters and leaves a business during a reporting period. The cash flow statement provides a more detailed analysis of how the money was spread out during the company’s accounting period. Cash flow statements are extremely important documents when it comes to valuing a company and having a more fluent understanding of the company’s operations. A cash flow statement typically has three sections to it: 

  • Cash flow from operating activities: The revenue that is primarily generated through the activities of an organisation, and also other non-investing and non-financial activities. It translates to any cash flows that occur through current assets and liabilities.
  •  Cash flow from investing activities: This section contains the cash flows that occur through the acquisition and disposal of long-term assets and other investments not included in cash equivalents.
  • Cash flow from financing activities: This section contains the cash flows that cause changes in the size and composition of the contributed equity capital or borrowings of the entity (i.e., bonds, stock, dividends).

There are a couple of more definitions that the user must know apart from the definition of cash flow in order to better understand the whole process:

  • Cash Balance: The cash balance basically means how much cash the business has in hand and how much cash balance the business has on the balance sheet.
  • Cash Equivalents: Cash equivalents are things like cash held as bank deposits, and any cash assets that can be converted very easily. These convertible cash assets include overdrafts and cash equivalents with maturities that are short-term. Here, the phrase “short-term” means a period of time that is less than three months.  

Steps to Create a Cash Flow Reports

Following are the steps that any person who desires to create a cash flow report must follow in order to be able to successfully create a correct cash flow report.

Step 1: Determining the starting balance

The first step that the reader must complete while preparing a cash flow statement is that they need to first determine the starting balance of cash and cash equivalents at the beginning of the reporting period. 

Anyone can find this value in the income statement of the same accounting period. Why the reader must determine the starting balance before doing anything else because it is a necessary step to do while working with the indirect method to calculate the amount of cash flow. The direct method does not require this step to be achieved as this information is redundant in the direct method. 

Step 2: Calculating the cash flow from Operating Activities

The next thing that the user must do after determining the starting balance is that they need to calculate the cash flow from operating activities. It is an important step as it shows the person concerned about how much cash is actually being generated by the operations of a company. There are two ways to calculate the cash flow from operating activities:

  • Direct method: This process, as the name suggests, is a pretty straightforward, or ‘direct’ way of calculating the cash flow from operating activities. This process requires all the cash collections to be taken from operations, and then subtracted from all the cash disbursements from operations. The result of this process is a list of all transactions that ended up being either cash paid or cash received during that period of time.
  • Indirect method: This process is a very different process from the direct method that was discussed in the previous bullet point. It first asks for the net income from the income statement, then it asks for adjustments to reverse the impact of the accruals made during the reporting period.

Even though these are two processes that seem to take two very different approaches to calculate the cash flow from operating activities, the number that they both provide after the process is complete is the same. 

The direct method is a little more intensive in terms of effort as each transaction needs to be accounted for that was made during the reporting period. On the other hand, the indirect method is a much faster way and is actually preferred by most companies today. 

Step 3: Calculating the Cash Flow from Investing Activities

The next thing that the user must do after calculating the cash flow from operating activities is that they need to calculate the cash flow from investing activities. As discussed above, this section contains the cash flows that occur through the acquisition and disposal of long-term assets and other investments not included in cash equivalents. 

To be put in simpler words, it is a collection of the cash flows that are related to the sale and purchase of assets that are long-term (property, facilities, equipment, etc). This section only includes investing activities involving free cash, not debt.

Step 4: Calculating the Cash Flow from Financing Activities

The next thing that the user must do after calculating the cash flow from investing activities is that they need to calculate the cash flow from financing activities. 

As discussed above, this section contains the cash flows that cause changes in the size and composition of the contributed equity capital or borrowings of the entity (i.e., bonds, stock, dividends). To be put in simpler words, this section contains information about the cash flows from both debt and equity financing, i.e., cash flows associated with raising cash and paying back debts to investors and creditors.

Step 5: Determining the ending balance

The next thing that the user must do after calculating the cash flow from financing activities is that they need to determine the ending balance at the end of the reporting period. The person concerned must make note of the change in net cash for the period. This change is the result of the sum of cash flows from operating, investing, and financing activities. A positive change in net cash for the period means that the company had more money coming in than going out and vice versa.


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