The Statement of Cash Flow is one of the three basic financial statements. Like the Statement of Operations, the Cash Flow Statement describes changes during a period of time, such as a month, a quarter, or a year. Specifically, it describes changes in cash balances during the period. The Statement of Cash Flow can be somewhat of a dichotomy in that it is at the same time the easiest and the most difficult statement to understand.
It’s easy in that it clearly lays out an explanation of how the cash balances changed. It divides the changes of cash into three categories: Operations, Investment, and Financing Activities. The Operations section shows how cash was generated from the business operation. The investing activities section shows the amount of cash that was used to purchase assets, such as land and equipment, as well as cash that was received from the sale of assets. The Financing section shows financing activities, such as cash that was received from borrowing money, as well as paying money back.
The section of the cash flow statement that is the most difficult to understand is the operating section. This is because it is essentially a reconciliation of accounting based on the accrual method to the accounting based on teh cash method. In order to make this happen, non-cash expenses, such as depreciation or the loss on a sale of an asset, have to be added back to net income. Additionally, changes in accounts that are meant to accommodate the accrual basis of accounting have to be added or subtracted. These accounts include Accounts Receivable, Inventory, Accounts Payable, Accrued Expenses, and other accrual related accounts.
At the end, we have a complete reconciliation of how cash balance changed during the period.
Forecasted Statements of Cash Flow are essential to include in your business plan because bankers and investors want to know exactly how you intend to generate cash. This statement gives them the ability to analyze the reasonableness of your model. Remember, the Statement of Cash Flow is only one of the three basic financial statements, the other two being the Balance Sheet and the Statement of Operations.
For a simple understanding of the other two basic financial statements, visit the video section of our website at www.CfoOutsource.com.