Cashflow Statement

⏩Brief Explanation

Tracks company cash inflows and outflows over a period.

📔Glossary Definition

A cash flow statement is a financial document that provides a detailed analysis of what happened to a business's cash during a specific period. It categorizes cash flow into three main activities: operating (cash earned or spent in the course of regular business activity), investing (cash used for or generated from investments in assets), and financing (cash exchanged with investors and creditors). This statement is crucial for assessing the liquidity, flexibility, and overall financial health of a business. It helps stakeholders understand how the company generates and uses its cash, crucial for evaluating its ability to generate positive cash flow in the future.

🔢Worked Example: Ezee eBikes

In a quarter, 🚲Ezee might have:

Cash inflows: Sales of £50,000, a bank loan of £10,000.

Cash outflows: Purchase of new bikes for £20,000, rent £5,000, salaries £15,000.

Using these figures, the cash flow statement would show a net increase in cash for the period, calculated as:

(Inflows) - (Outflows) = Change in Cashflow

(£60,000) - (£40,000) = £20,000.

🗣️Usage in a Phrase

"The cash flow statement for this quarter shows a healthy increase in our cash reserves, driven mainly by robust sales and a controlled expenditure on assets

🥸Detailed Explanation

The cash flow statement is a vital financial document that tracks the movement of cash within a business over a specific period, such as a month, quarter, or year. Unlike the income statement, which uses the accrual basis of accounting to record revenues and expenses when they are earned or incurred, the cash flow statement focuses solely on cash activities. This makes it an essential tool for understanding a business's liquidity and financial stability.

Key Components:

Operating Activities: This section records cash generated or used in the core business operations. It starts with net income and then reconciles all non-cash items to cash items involving operational activities. For 🚲Ezee, this would include cash received from customers for e-bike sales and cash paid to suppliers and employees.
Investing Activities: These are cash flows from the purchase and sale of long-term assets, like equipment or property. For a business like 🚲Ezee, this might include the purchase of new e-bikes for sale or investment in a new store.
Financing Activities: This section includes cash flows associated with borrowing and repaying bank loans, issuing and buying back company shares, and paying dividends. For 🚲Ezee, taking out a loan to expand its inventory or repaying part of a long-term debt would fall under this category.

Importance and Implications:

The cash flow statement provides critical insights into a company’s liquidity and solvency, indicating whether it can meet its short-term obligations and continue operations. It can reveal trends and raise red flags about financial health that might not be apparent from the income statement or balance sheet. For example, a company like 🚲Ezee may be profitable according to its income statement, but if its cash flow statement shows a consistent cash burn (more cash going out than coming in), it could be a warning sign of potential liquidity problems.

Analysing Cash Flow Statements:

Positive vs. Negative Cash Flow: Positive cash flow indicates that a company’s liquid assets are increasing, enabling it to settle debts, reinvest in its business, return money to shareholders, pay expenses, and provide a buffer against future financial challenges. Negative cash flow, on the other hand, means the company’s liquid assets are decreasing
Free Cash Flow: This is the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. It's an important measure because it allows a business to pursue opportunities that enhance shareholder value.

Methods to Improve Cash Flow:

Efficient Inventory Management: For a business like 🚲Ezee, maintaining the right amount of inventory is crucial. Overstocking ties up cash unnecessarily, while understocking can lead to lost sales.
Managing Receivables: Implementing strategies to collect receivables quicker, like offering discounts for early payment, can improve cash flow.
Extending Payables: While maintaining good relationships with suppliers, negotiating to extend payment terms can keep cash longer.
Cost Control: Regularly reviewing and controlling operational costs can conserve cash.

For start ups and small businesses, understanding and managing the cash flow statement is essential for sustainability and growth. It provides a real-time snapshot of the business’s financial health, beyond what income or profit figures might suggest. For 🚲Ezee, a well-managed cash flow can mean the difference between thriving and merely surviving in the competitive e-bike market. By accurately tracking and analysing cash flow, businesses can make informed decisions, plan for the future, and adapt to changing financial circumstances.