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A Cash Flow Statement...

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A cash flow statement is a financial report that outlines the flow of cash in and out of a business over a fixed period of time.

business financial plan

The Cash Flow Statement is one of the 3 big financial reports that business owners (or their accountants) produce for each accounting period and is perhaps the most important report out of all three as even the most profitable business will have difficulty staying in business, if it does not have enough cash on hand to pay the bills or to meet the payroll! 

Although a profit and loss statement (also known as an Income Statement) summarizes the operational transactions of the business (expenditure and revenue) and calculates the profit generated from the trading activities of the business, it does not provide any information about the investing and financing transactions of the business.

The fund statement or cash flow statement provides the business owner with a report on the liquidity of the business and discloses the extent to which the business has generated funds from operations (trading and other activities) over the reporting period.

For an existing business this report is based on actual flows of funds in and out of the business.  If the Cash Flows are being prepared as an inclusion in a business plan for a new or an existing business, the figures will be based on the financial forecasts developed during the business planning process. 

Preparation of a Cash Flow Statement

There are two approaches to presenting cash flows from operating activities. The first is the direct approach, which involves reporting gross operating cash inflows and gross operating outflows. A statement developed using this method will look something like this:

The second approach is the indirect approach, which is based on the profit and loss statement but adjusted to reflect the cash flow from activities.

With this approach you need to reconcile the cash flows with the operating profit after tax as reporting in the Profit and Loss or Income Statement and it will look something like this:

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