Did you know that 61% of small businesses worldwide experience cash flow issues? Inconsistent and limited cash flow can make paying loans, employees, or vendors difficult.
One way your business can avoid such a predicament is by paying attention to the cash flow statement (CFS). This statement summarizes the movement of cash equivalents and cash coming in and going out. You can use it to measure money used to fund operations and settle debt obligations.
A CFS comprises operating, investing, and financing activities. Here’s a breakdown of the expenses that make up each activity:
Net Earnings
Referred to as net income, net earnings usually include the sum of money a business makes. You can calculate this amount by subtracting taxes, interest, depreciation, and operating expenses from sales.
Net earnings help you weigh the revenue against the expenses of your company. They help measure profitability and cash position. Also, they form part of the operating activities in a CFS.
Higher earnings suggest you are making a lot of profit and vice versa. They also imply that your company’s sales are growing tremendously.
Depreciation
As part of the operating activities, depreciation is an expense that reduces an asset’s carrying value. And instead of being an explicit expense, it takes the form of a scheduled estimated expense. You can include it in your cash flow statement, balance sheet, or income statement.
Only a few options are available when managing an asset’s carrying value on your accounting books. Through the depreciation method, your company can expense an asset’s cost over time while reducing its carrying value.
There are also multiple accounting entries to associate this expense with. If you are dealing with the first payment of an asset, use a debit to the fixed asset account and credit to accounts payable as the accounting entries.
Decrease in Accounts Receivable
The accounts receivable asset of your business reflects the amount of money customers owe you. It suggests that your company will generate cash from some pending payments. So, any decrease or increase in this asset can affect the cash flow.
Your cash flow considerations will determine how long you can wait for customers to make the payments. Either way, you need to create an invoice for the transactions and send them to your customers. And each time a customer pays, the amount will reflect in the accounts receivable balance.
Your company will have a decrease in accounts receivable after retrieving most of its pending payments. As a result, more cash will enter your business. You will also add the income to your net earnings.
A Guide to Analyzing Your Company’s Cash Flow
Increase in Accounts Payable
Accounts payable is the total amount of cash your business owes to third parties. These third parties include suppliers and vendors.
You will have a positive cash flow if your accounts payable balance is high. It may suggest that your company is yet to spend money on paying the debt.
A bill that is due for payment suggests an increase in accounts payable. On the other hand, paying the bill will lower the accounts payable balance.
You should always track your accounts payable to improve your business operations. The general rule here is to pay your vendors or suppliers on time. Ensure you still have adequate cash to run your business before sorting out the bills.
Increase in Tax Payable
Tax payable is the amount your company expects to pay as taxes within 12 months. You can report it under the operating activities of your cash flow statement.
Your tax payable calculations will consider the local tax laws and rates. So, check with the jurisdiction your business operates in to calculate the taxes owed.
Whichever method you use to calculate the taxes, ensure that your company complies with the IRS’ taxation rules. Consider seeking tax services for a more professional approach to handling taxes.
Increase in Inventory
If your business records an increase in inventory, it spends more cash on raw materials. The cash most likely comes from your net earnings.
It’s important to track your inventory to prevent cash flow issues. So, as you stock up on items for your business, ensure that the purchase doesn’t take a large portion of your finances.
When reporting inventory on a cash flow statement, any increase in the stock appears as a negative amount. It suggests that your company bought more goods than it recently sold. As a result, the purchase will negatively affect your cash flow.
If your inventory stock reduces, you can report it as a positive amount. It means that your cash flow is sufficient.
Cash Inflows and Cash Outflows from Investing Activities
Cash flow from investing activities reports the money spent on or earned from investment-related activities. Investing activities may include selling assets or securities, investing in securities, or purchasing physical assets.
Various elements form part of the cash inflows (proceeds). They include:
- Cash receipts from loan collections and sales of debt instruments
- Cash receipts from investment pools not used as a demand account
- Cash receipts from dividends and interest
- Cash receipts from sales of equity instruments
Your cash outflows (payments) from investment-related activities comprise several things. These include cash payments for loans, acquiring equity instruments, and acquiring debt instruments.
Cash Flow From Financing Activities
Financing activities focus on how a company raises capital and pays it back to its investors. They also measure the cash flow between a business and its creditors and owners.
Increased cash flow from financial activities suggests that your company raised more money. Examples of financing activities include spending cash to repurchase stock or receiving cash from giving out stock. Other examples include paying dividends to shareholders and receiving cash from issuing debt.
Need Help with Accounting and Cash Flow in Charlotte, NC?
A cash flow statement highlights a company’s cash management capabilities. Its main components include operating, investing, and financing activities. Each of these activities comprises different expenses, as discussed in this guide.
If you are looking for a professional service firm to help your business with accounting and cash flow, count on Basta+Croop. We deliver client advisory services to businesses and individuals in Charlotte, NC. Learn more about our services and contact us today for further assistance.