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Cash Flow Statement Simplified

  1. Cash Flow Statement SIMPLIFIED! Tolu AGUNBIADE 19 March 2015
  2. 1. What a cash flow statement is 2. How to prepare a Cash Flow Statement 3. What Your Cash Flow Statement says about your business Today, we’ll learn:
  3. What is a Cash Flow Statement?
  4. …and what is it used for?
  5. Simply put, a cash flow statement is the movement of money in and out of your business.
  6. A cash flow statement can answer the questions: ‘Where did the money come from?’ and ‘Where did it go?’
  7. The primary purpose is to provide information regarding a company’s cash receipts and cash payments
  8. It can be used to assess the timing, amount and predictability of future cash flow.
  9. How is the Cash Flow Statement Different from The Other Financial Statements?
  10. The Cash Flow Statement complements the income statement and Balance Sheet.
  11. It is designed to convert the accrual basis of accounting used in the income statement and balance sheet back to a cash basis.
  12. While the income statement tells you if you are making a profit or a loss and by how much.
  13. The Balance Sheet tells you what you own, what you owe and who you’ve gotten money from.
  14. They are both prepared on accrual basis.
  15. The Cash Flow statement is the one financial statement prepared strictly on a cash basis and lets you know how much liquid cash your company is making.
  16. “As the number of corporate failures has risen, there is one line that bankers continue to echo: it is not a fall in profits that leads to failure, but a lack of cash.” Source: The Financial Times
  17. “In too many situations, companies and their investors have been focused on profits, but in an environment where liquidity is tight and confidence thin, cash is king.” Source: The Financial Times
  18. What Makes Up a Cash Flow Statement?
  19. Part 1: Operating Activities
  20. Operating activities in cash flow arise from normal business operations such as revenues and cash operating expenses after taxes.
  21. Operating activities that create cash outflows include payments by suppliers, payment to employees, interest payments, and payment of income taxes.
  22. Cash inflow (+) • Payment for services rendered • Payment from customers Cash outflow (-) • Payments to suppliers • Payments to employees • Payments to government • Payments to lenders • Payments for other expenses
  23. Part 2: Investing Activities
  24. Investing activities involve buying and selling of current and fixed assets.
  25. Cash inflow (+) • Sale of property, plant and equipment • Sale of debt or equity securities (other entities) • Collection of principal on loans to other entities Cash outflow (-) • Purchase of property, plant and equipment • Purchase of debt or equity securities (other entities) • Lending to other entities
  26. Part 3: Financing Activities
  27. Financing activities include borrowing and repaying money, issuing stock (equity) and paying dividends
  28. For example: If you borrow funds to purchase equipment or pay off a loan, the cash flow statement will enable you to determine how much cash was either generated or used as a result of those transactions
  29. How to Prepare a Cash Flow Statement
  30. 1. There will be a starting balance of cash at the beginning of each period 2. You will have increases or decreases in cash via operations; the company made or lost money on the core business 3. The company will use cash throughout the year to pay for things i.e. new assets 4. Some companies may choose to raise additional cash throughout the year
  31. + Cash Flows from Operating Activities + Cash Flows from Investing Activities + Cash Flows from Financing Activities = Increase OR Decrease in Cash (Ending) + Beginning Cash Balance = Ending Cash Balance
  32. How to Analyze a Cash Flow Statement
  33. When analyzing cash flow, the first place to look is the cash flow for operating activities
  34. A large increase in use in cash may be positive as it indicates a large booking or deal has occurred for which payment is expected
  35. A lack of investing activities, which is few purchases of new equipment or other assets, may indicate stagnant growth.
  36. As a company expands, financing activities will become increasingly important.
  37. It will tell outsiders how the company has grown and the financial strategies of management.
  38. What do you do when you have a negative cash flow?
  39. Make an effort to increase sales!
  40. Try and collect payment from customers more quickly. This can help you avoid long gaps and avoid transactions dragging on.
  41. Attempt to reduce monthly expenditure. Buy supplies in bulk to get a discount, buy from a more competitively priced supplier, rent smaller premises, switch utility companies to reduce monthly outgoings – anything!
  42. Thank You 