unconventional-cash-flow

What is Cash Flow Statement? It’s Uses, Importance, Types

As a businessman you are supposed to prepare multiple reports to Calculate your Businesses financial condition for a given accounting period. Reports like Sales & Revenue reports, financial reports, inventory reports, formal & informal business reports, summarized business reports, GST reports, performance reports, annual reports etc, but few of them are required to prepare on a daily basis to measure the actual performance and effect of it on your business. 

# Here we will explain Cash Flow statement Types, Importance, Uses

What Is a Cash Flow Statement?

The statement considers how well a company manages its cash position is known as cash flow. Cash Flow statement is a financial statement that shows the cash inflows and outflows of your business’ during a specific period of time. It is used to check out a business’s financial health.

This statement compares money in money out to determine if a business’s cash flow is negative or positive. The statement also shows how much money a business frequently has on hand at the end and start of a specified period of time. If your business is spending more in cash in comparison to cash receiving then the cash flow will be negative & vice versa. It also helps to Plan & Maintain a positive flow of cash for your business by keeping track of it on a daily basis. As per performance of cashflow statements you can draw up plans for your company about future budgeting. 

Importance of Cash Flow Statement?

The cash flow statement is that it measures the cash inflows or cash outflows of your company during a given period. Here are the Some importance of cash flow statement:

  • Cash flow statement is considered a useful and important tool for short term planning as well as cash tracking for the management of your company.
  • One of the importance of the cash flow statement is that there are certain payments that the company makes and that payment is not reflected in your company’s profit and loss statement. But all such payments are present in the cash flow statement. It gives complete information about how much money is being spent by the company.
  • Cash flow statement helps companies to analyze to what extent your company’s cash planning was successful. Because actual results can be used from a cash flow statement or projected statement of cash budgets.
  • Cash flow statement helps the management to make long term plan for cash. Because it is important for your company to do long term financial planning because the growth of the company depends on it.
  • Working capital is that component of cash flow from operations that can greatly affect a companies’ cash flow. Thus investors should have an awareness of the working capital movement in the company.
  • Cash flow statement helps the company to find out the optimum level of cash balance. Determining the optimum level of cash balance for the company is essential as it can help your firm to know whether the company’s funds are lying idle, or cash short or high.

What is the use of cash flow statement?

  • Cash flow statement facilitates the formulation of sound financial policies for your company. It also helps in evaluating the current cash position.
  • A projected cash flow statement can be prepared to show the future cash position of a company so that a firm can plan and coordinate its financial operations.
  • Cash flow statement helps in getting loans from banks and other financial institutions. And through this you can understand the repayment capacity of the firm.
  • It helps the management to take short-term financial decisions.
  • The statement explains the reasons for poor cash position in spite of substantial profits in the firm by highlighting the various applications of cash made by the firm.
  • Historical and projected cash flow statements can be compared to find out variations in performance and shortfall or otherwise so that the firm can take immediate and effective action.

How Cash Flow Statements Work?

Many Businesses Fail to manage cash flow, which is why this is a critical tool for companies. To understand it better it’s broken down into three different business activities: operations, investing, and financing. These three activities are also called as types of cash flow statement.

Operations – Cash flow from operating activities (CFO) indicates the amount of cash that a company brings in from its regular business activities or operations, such as manufacturing and selling goods or providing a service to customers. The cashflows from the operations section can also include accounts receivable, accounts payable, amortization, depreciation, and other items.

Investing – Cashflow from investing activities includes the cash generated or spent relating to any investment activities & is the result of investment gains and losses like cash spent on property, plant, and equipment, etc. .

Financing – Cashflow from financing activities (CFF) measures the movement of cash between a firm and its owners, investors, and creditors. This shows the net flow of funds used to run the businesses including debt, equity, and dividends.

The value comes after the all debits and credits of cash done for these three segments is called net cashflow.

Why a Cash Flow Statement Is Required?

It is one of the main financial-statements of business accounting after the income statement & balance sheet. Cash-flow statement is required to measure the profitability & the long-term future outlook of an entity. It can help to evaluate whether you and your business have enough cash to pay expenses or not.

It is important to manage your cash-flow report effectively to gain better understanding of your current spending’s. It provides the money to pay your bills, buy supplies, pay your employees, and keep your business operating. Keeping track of your business cash flow should not be a headache. That is why Vyapar app helps to Create your cash flow report automatically once transactions happen and updated in App.

Advantages of cash flow statement

Every Financial statement is having a specific value of use. That is why every statement has its own importance and benefits in different ways. Here are the benefits of cashflow report:

  1. It helps to verify the capital cash balance of a business even on a daily basis.
  2. It helps you to ascertain the liquidity and profitability position of businesses.
  3. Monitoring cash flow regularly helps to avoid 55% business risks.
  4. This report can find out where you stand financially.
  5. It is mainly used in preparing the cash budget for future needs.

Limitations of cash flow statement

  1. Cash flow statement cannot be equated with income statement. An income statement takes into account both cash and non-cash items. Hence cash fund does not mean net income of the business.
  2. Being a broader concept of working capital funds, the fund flow statement presents a more complete picture than the cash flow statement.
  3. Cash flow statement only shows cash inflow and cash outflow. But, the cash balance as disclosed by the statement may not reveal the actual liquid position of the business.
  4. The cash flow statement does not give you a complete picture of the financial position of the business entity.
  5. Preparation of cash flow statement is only a postmortem analysis. In this method there is no projection of cash into the future.
  6. The accuracy of the cash flow statement is based on the balance sheet. If the balance sheet is incorrect, the cash flow statement is also incorrect.

Cash Flow V/S Fund Flow

BASISCASH FLOWFUND FLOW
MeaningIt is a statement showing the inflows and outflows of cash over a period.A fund flow statement is a statement showing the changes in the financial position of the entity in different accounting years.
Purpose of PreparationTo show the reasons for movements in the cash at the beginning and at the end of the accounting period.To show the reasons for the changes in the financial position, with respect to previous year and current accounting year.
BasisCash Basis of Accounting.Accrual Basis of Accounting.
AnalysisShort Term Analysis of cash planning.Long Term Analysis of financial planning
DisclosesInflows and Outflows of CashSources and applications of funds
Opening and closing balanceContains opening and closing balance of cashDoes not contain an opening balance of cash
Part of Financial StatementYesNo

Income Statement V/S Cash Flow Statement?

BASIS FOR COMPARISONINCOME STATEMENTCASH FLOW STATEMENT
MeaningThe income statement is also a part of a financial statement which is used to show the revenues, gains, expenses and losses for a specific accounting period.It is a part of a financial statement that is used to reflect the inflows and outflows of cash only for a particular accounting period.
Divided intoTwo activities- operating, nonoperatingThree activities- operations, investing, financing
BasisAccrualCash
ObjectiveTo know the profitability and owner’s equity.To ascertain the liquidity and solvency of business.
PreparationOn the basis of various records and ledger accounts.On the basis of cash transactions made in a specific period of time.
DepreciationConsideredNot considered

Frequently Asked Questions:

# How Many Businesses Are Facing Problems Due to Poor CashFlow?

Estimated 82% of business failures are due to poor cashflow management. Small Businesses owners and CEOs need to make decisions that sometimes can cause negative long term results with their business’ cashflow.  Managing your cash flow properly takes time and energy, but it’s imperative to understand where your cash is coming in and how it is leaving. These are the some common cash flow problems that can severely impact your business:-

  1. Late payments.
  2. Lack of profitability.
  3. Undervalued products or services.
  4. Use of old equipment.
  5. Not Creating a CashFlow Budget.
  6. Collecting Receivables Too Slowly.

# How to Improve Your CashFlow? 

Cashflow increasing key is not just bringing in more cash inflows, but also by limiting your cash outflows. This means you have to manage your expenses just as much as your sales. These are some strategies help to improve your cashflow:-

  • Offer Discounts for Early Payment.
  • Improve Your Inventory.
  • Send Invoices Right Away.
  • Vendor offers a discount for paying early.
  • Make it Easy to Pay by using UPI or QR code option
  • Identify & Target New Markets to increase the flow of money.

# Can CashFlow be Negative?

Yes, Negative cash flow is when a business spends more money than it makes during a specific period. It is often indicative of poorly managed receivables and the misunderstanding of how to use credit. These are the some reasons your cash flow may be down:-

  • Mismatched spending and income.
  • Fraudulent activity.
  • Large cash outflows.

Temporarily, negative cash-flow is allowable, but repeated negative cash flow can cause a business to fail.

# How to do a Cash Flow Analysis?

To do a cashflow analysis you need to prepare a cashflow statement which will track how much money is coming in and out of your business. Then you can analyse your operating expenses, investments, financing costs etc. With the help of cash-flow analysis you are examining precise details of where your business sends and receives money. If your cash flow analysis shows that you are about to be low on cash and not able to make your payments, you can adapt by obtaining financing, cutting costs, or trying to increase income. 

# What Happens When Your Cashflow is Negative?

When your business is negative. You cannot cover your expenses from sales alone. In this time your business may face many problems like-

  • Unable to pay bills
  • You will be forced to borrow money
  • You must pay interest
  • Pendency of direct or indirect expenses may increase day by day due to lack of money.
  • Loose your goodwill and credibility
  • Overall the business will be in lose

# Is it Necessary to Prepare a CashFlow Statement Along With the Financial Statements?

As per the accounting standard 7, cashflow statements play a crucial part in preparing the profit and loss account. Hence preparation of cashflow statements required at the end of the annual year along with the financial statements.

# What is Meant by Demand Deposits in Cash Inflows?

Demand deposits are the cash deposits which are held at a bank or any other financial institutions drawn based on requirement. These are mainly used for fulfilling the short term cash requirements in the business.

# 5 Reasons Why Tracking Cashflow Daily is Necessary For Business Growth!

1. Monitoring cash flow regularly helps avoid 55% of business risks.
2. You can find out where you stand financially.
3. You’ll know on what days sales are high/low.
4. Measuring cash flow makes it 2X times easier to run your business.
5. More than 90% of successful businesses track their income daily.

Cash flow is one of the most important aspects of small businesses. It is impossible to maintain any business without healthy cash flow, growing your business, hiring new employees, and managing your finances properly. Managing and tracking cash flow is not always an easy task but it is an important one.

As a businessman, you must understand and track your cash flow on a day-to-day basis. In addition, you need to know how the amount you bring into your business compares with the outgoing amount. If you’re spending more than you earn, you’ll need to make some changes to your strategies to avoid bankruptcy.

All types of enterprises, large and small, depend on inflows of cash generated from sales, investments, loans, and other sources. These inflows are offset by cash outflows or disbursements for fund inventory, payroll, capital expenditures, investments, and operating expenses. Positive cash flow is very essential for the survival of your business. It is a fact that maintaining a positive cash flow can become a challenge for you and your business. When you face cash flow challenges, you are not able to pay your bills on time, leading to a reduction in its credit line or higher interest rates.

Why is it important to constantly monitor your cash flow?

Cash is the king of every business. Cash is something you must pay to your suppliers and employees so that you can produce and sell your products. Your customers pay you after receiving the products they ordered. That’s why you need cash to continue producing goods and maintain inventory. Also you need to carefully monitor the difference between your cash outflow and the inflow from customers. The longer your average receivables amount, the more cash you’ll need to maintain the viability of the business. Cash flow management is only delaying the outflow of cash for a reasonable amount of time and ensuring that your customers make payments on time.

Many factors can contribute to your business’s cash flow problems, some of which are listed below:

  • Bad Collection Practices

Did you know that giving credit to customers provides flexibility and convenience? It serves to build your business and customer base. Increasing credit also means you need to manage the collection process for your business. Asking customers to pay their bills can be a daunting task. You may prefer to focus on your business operations rather than making collection calls. However, when you give credit to customers, you experience zero cash flow until your customers pay. Remember that if your customers fail to pay their bills on time, your business will face consequences.

  • Insufficient savings

Many small businesses experience this seasonality with their sales. For example, If you own a retail store, you may experience a surge in sales before Christmas. But you will experience a drop in sales at other times of the year. You need to save the most to meet your cash needs during this time. Business owners who fail to save enough money in slow times face cash flow problems.

  • Unplanned Expenditure

It is a fact that any business can be affected by unplanned expenses. Whether your furnace needs repair or an unhappy customer takes legal action against your business. Since you are not planning these expenses properly, you will have to find other sources to pay for them. If you withdraw this money from a business bank account, you are bound to be short of the funds needed to pay your current obligations. Remember that the consequences of poor cash management can be disastrous for businesses and business owners. A company that cannot fund current operating expenses and that cannot meet payroll is effectively out of business unless immediate cash flow financing can be arranged.

Sellers usually expect payment within 30 days. Maintaining good credit with your vendors can help you get better prices and better credit terms. It also saves you from paying upfront for purchases. Late payments hurt your credit not only with your business or a particular vendor but also with other vendors and the financial community. The first thing that every financing firm pays attention to is your credit rating which is very important to manage. A good credit rating of any business indeed equates to lower interest rates and more money available to you when you borrow.

10 Best Practices to Maintain a Steady Cash Flow For Your Business

The idea of running a business and maintaining it is a tough job. Many startups lose money because, as good as their ideas might be, they lack proper management. As a business, you might start to run out of money if you’re not keeping track of your cash flow. 

Maintaining a good cash flow requires proper financial knowledge and management. And to keep it easier for you, we have shared some practices you can adopt to maintain a steady cash flow for your business. 

Don’t worry we’ve kept it very simple and easy to understand. 

10 Best Practices to Maintain a Steady Cash Flow 

1. Conduct Customer Credit Check

Make sure to conduct a credit check when a customer offers to purchase through credit instead of cash. If they don’t have a good credit background, it’s more likely they won’t make payments on time, which can put your business into trouble.

To avoid that, you can charge them high interest rates for late payments. It will establish security and won’t affect your cash flow. 

2. Send Invoices on Time

Sending invoices on time plays a huge role in your business. It helps establish an understanding between you and your customers. Keep the invoicing timings to Immediate, 15 days, 30 days, and 60 days. Send invoices in a pattern, so your customers don’t forget to pay you.

Include necessary details like due date, late payment charges, etc., clearly in your invoice. If you want to make your invoicing system more efficient, consider signing up for invoicing software. 

3. Offer Discounts for Early Payments

Rewarding your customers with a discount when they make an early payment can be a great way to maintain a steady cash flow. It generates new initiatives for business growth, leads to better customer satisfaction, and benefits both you and your customers.

4. Use Electronic Payments

Electronic payments are fast becoming a great way to secure a steady cash flow for your business. It is because electronic transactions are safer, faster, and easier to perform as compared to traditional paper-based payments.

Electronic payments save you a lot of time. Transactions happen more smoothly, and they even include rewards and cashback for your customers.

5. Increase Your Prices

If your customers are satisfied with your products/services and you know you’re offering the best in the market, don’t be afraid to increase your prices. 

In the long term, your pricing strategy is just as important as your business plan. Customers will always value you for your quality services/products, and when you offer them that, they will happily pay you the said amount. Moreover, this helps your business serve your customers better by expanding your cash flow. 

6. Charge High Interest on Late Payments

For customers who make a late payment, charging a high-interest rate can be a way to keep your business in line. It will ensure a better cash flow. 

Charging high interest on late payments has been a source of revenue opportunity for businesses for several years now. It helps a business build up its income significantly. 

7. Pay Suppliers Early

Negotiation is an art every business should know. While getting your supplies, ask your supplier if an early payment from your end can get you any discount. Negotiate. Chances are that they will agree to your conditions. 

Once that happens, it will help you save more money and maintain cash flow for your business. 

8. Improve Your Products/Services

Keep a check on what’s selling and what’s not. Get rid of products that are not making profit, even if you have to sell them at bigger discounts. Produce more products that align with your business goals and maintain cash flow. 

9. Keep a Check on What Went Wrong

Pay special attention to your customers who are not satisfied with your products/services. It could be the best way to know where you’re going wrong and can help you improve your business.

Ask your customers what they didn’t like. If they’re still not satisfied, offer them a discount. This way, they will value you more, and it will help establish trust. Therefore, improving your cash flow. 

10. Maintain Emergency Funds

Emergency funds act as your savior in bad times. They have the purpose of protecting the business from unknown and unforeseen challenges that could affect its cash flow. 

So, creating and maintaining an Emergency Reserve Fund (ERF) for your business is paramount, allowing you to be in control of your financial destiny. The money should be sufficient enough to cover at least three to six months of your expenses. 

# 10 Strategies to Improve Cashflow Management Of Your Business

Just as we need blood circulation to survive, small businesses need cash flow for their circulation. As soon as the blood circulation of our body stops and we get into a very bad situation, in the same way, small businesses are in a state of failure when the cash flow is negative. Managing cash flow is one of the most difficult parts for any small business owner. Therefore, the owner of the businesses must have some cash to rebuild the business or new resources. The effects of cash flow can significantly affect your business decisions and, if not carefully monitored, can be unreliable on a regular basis.

10 strategies suggested to improve the cash flow of your business 

1. Keep Invoicing on Priority 

Efficient invoicing is a very good strategy for small businesses to maintain stable cash flow. So that you send your invoices as soon as possible, be clear on your payment terms, and follow the unpaid invoices as soon as they are overdue. In today’s era, you don’t have to think more or try to send invoices to your customer, you can easily share invoices to your customer via WhatsApp with the help of accounting software. This solution will easily motivate your customer to pay you soon by receiving an invoice on time.

2. Tell Your Customers to Pay Fast

If you want to manage your company’s cash flow, another option for this is to get paid faster. This can take many forms, the simplest form is to announce a discount. For Example, You give customers a 1% discount on paying the invoice within 08 days. Otherwise, if you pay the entire amount in 30 days, they will get a discount of 3%, etc. This can be an attractive offer for the customers of the company, as it will give them the benefit of paying their bills faster so that they are ready to pay as soon as possible. Which would be good for your company’s cash flow.

3. Deduction or Delay Expenses

If customers do not pay fast, another option is to delay expenses. The strategy can take various forms depending on the business. If you find in your cash flow analysis that your outgoing is more than your inward, then it may be time for you to cut some wasted and personal expenses. Reducing some unnecessary expenses will help you to balance your cash flow to some extent. It is never an easy thing to cut your business. The first step is to identify all your business expenses and order them in terms of priority. You can find some things in which you cannot cut at any cost, but at the same time, you can also see some things that you will not have much effect on cutting. Other things on your spending list may simply require a different approach or a cheaper alternative.

For example, if you are spending too much on printing costs, making your office paper-free and using accounting software may be one way to create a simple deduction. The strategy can take various forms depending on the business. Manufacturing companies may consider using low-cost inputs to deliver the same goods or service, while a service company may choose to spend less time on the same work. Companies can also cut down by adopting several strategies such as eliminating existing inventories or replacing full-time employees.

4. Increase Margins

The goal of any growing business should ideally be to increase margins and sales to maintain good cash flow. Avoiding cash shortages is as important for growth as it is for the financial health of your company. Having a viable strategy to consistently work at increasing margins can help create stable cash flow over the long term. There are only two ways a business can increase its margin by either increasing or lowering its cost to deliver a product or service. This doesn’t need to be possible for most businesses. However, raising prices depends on businesses with strong demand for their product or service, or on a real offer with a unique product that is not available from competitors. To avoid different types of customers, any increase in prices will have to be carefully deployed, as the customer is a very important part of your business.

5. Hire Consultants

Most small business owners will have an area where their grip is not as strong as it would be everywhere. Perhaps you are very great at sales, but struggle with bookkeeping, or need to invest in marketing, but are not sure where to start. One of the best small business cash flow management strategies is to hire a professional accountant or an expert. An accountant can help you analyze your cash flow and identify ways to pay faster or reduce expenses. An accountant will also ensure that all your tax obligations are met and you remain as taxable as possible. 

6. Create a Cash Reserve in Case of Emergency

It is good practice if you, as an individual and a business, keep the emergency fund of a few months spent, because you never know when things might take a turn, and when our business is in any challenge or difficulty. Good small business cash flow management is also being designed for unexpected businesses. Today, when asked about the timing, its biggest bid is the COVID-19 crisis in which most businesses are losing money. Although it can be difficult to contribute to the cash reserve, make a habit of saving a little at a time as this is the only way to help you get over this problem. Over time, you should have a goal of having a cash reserve that can cover a few months of expenses and support your personal and professional life.

7. Use Your Business Credit Card

If you want to manage your cash flow in a better way, then it is a good strategy to use a business credit card as a cash flow buffer. Using a credit card to pay all your expenses means that you are not immediately digging into your cash reserves. The same can be said about accounts payable by you. If possible, your payment may be delayed until the actual due date but not earlier. When you pay your expenses, this strategy gives you more control, allowing you to delay payment until you are financially ready to pay yourself.

8. Set Automatic Payment Reminder

It’s a simple thing sometimes people forget to pay. Mostly if your customers own their own business, they will probably be busy with hundreds of other things and they will have a long list of people to pay, and they may forget to pay you. Not paying on time by your customers is not good for your cash flow. There are several strategies you can follow to avoid this, such as setting up automatic payment reminders with accounting software. This enables you to receive your payment which will help you to follow up with your customers and pay faster. You can send automatic payment reminders to your customers via SMS and WhatsApp and remind them to pay periodically. This is a simple step that can help reduce late payments and make your accounts receivable. In addition, a great strategy to use is to check the credit rating of any new customer who places a large order. If they have bad credit, they may also have a bad cash balance so that you will not be able to pay or fulfill your large order.

9. Conduct Your Cash Flow Analysis Regularly

The first step for any business to manage its cash flow is to perform a regular cash flow analysis. It is important to know where your business is in terms of cash flow, so it aims to do this at regular intervals throughout the year. You can do this every month or quarter or as many times as you want. One of the easiest ways to do this is to use online accounting software. Accounting software makes it easy to consolidate your accounts and generate cash flow statements. The advantage of using a cash flow statement is that you can identify any cash-flow problem or use that information to create a cash budget going forward.

10. Cash Flow Forecasting

Forecasting your cash flow is a successful practice of estimating the future financial condition of any business. You do this to ensure that your business is based on anticipated sales and that your company has all the necessary funds to keep it running. With its help, you can plan how much you expect to spend. To predict future sales and cash flows, cash flows can be forecasted by looking at profits and losses, sales, and expenses. This can be called an essential strategy for your company’s cash flow.

# Conclusion

With the help of these cash flow statement importance, uses, practices, strategies mentioned above, you will help yourself to improve your cash flow statement. Therefore, depending on the type of business you have, you can adopt these strategies that are helpful to your business and you can make your cash flow positive. By following the cash flow management strategies, practices we have listed above and being proactive about getting the help, you have a higher chance of being positive on your cash flow and accumulating more than the cash you spend.

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