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A cash flow statement finds out the inward and outward flow of money in a business and therefore acts as a bridge between the income statement and balance sheet. The change in cash per period, as well as the beginning and ending balances of cash, are present in a cash flow statement.

Why Cash Flow Statement is Important?

The cash flow report is important because it informs the reader of the business cash position. Businesses need cash to pay its expenses, to pay bank loans, to pay taxes and to purchase new assets. A cash flow report determines whether a business has enough cash to do these necessities.

Your cash flow statement is a vital tool understanding your business and tells more of a story than a profit and loss statement. The P & L is only based on invoices raised and received, the cash statement encompasses all money that flows in and out of the business. 

For a more generic look at cash flow overall not specific to the statement, we wrote a blog exploring this in more detail if you wish to know more.

Above is a standard cash flow summary from Xero, we will be using to explore the key areas of interest, what they mean and how they can be used. This report looks at the spending for the previous 3 months to give you an average spending figure, this can be adjusted to any number of months you would like to see for.

BREAK DOWN OF THE TOP ROW

The first column titled “Sep 2020” is the month selected to examine, typically the month at the end of the chosen period.

“Income %” is the percentage of income that revenue stream or expense is worth. The one of the left representing it for the chosen month and the right being for the YTD actual. 

“Avg” is the average monetary value for the period and factor selected.

“Variance” is the difference, represented as a percentage, between the “avg” and the month being examined “Sep 2020”.

“YTD actual” stands for year to date actual, this is the total spending in monetary terms of the factor being looked at.

INCOME

In the first row you can see “income”, below this can be all your revenue streams for your business, this dummy account it only contains “sales”. For example this could be broken down into retail and wholesale or UK vs Non UK sales.

OPERATING EXPENSES

Operating expenses is any cost incurred in the day to day running of the business and for the purpose of cash flow will include direct costs (Costs of Goods Sold). As illustrated above this can be broken down into a range of costs which can be analysed to assess where cuts can be made. 

NON-OPERATING MOVEMENTS

Non operating movements refers to the depreciation or appreciation associated with assets. This can include anything the company owns for example, office equipment, computer equipment or a fleet of trucks.  

 SUMMARY

The Net Cash Movement is the amount of cash that has gone through the business in the given period.

Opening balance is the amount of money within a business at the start of the time period with the Net Cash movement then determining the difference made to the closing balance for the end of that period.

RECOMMENDED NEXT STEPS

In isolation the Cash Statement is great for understanding the flow of money in your business but has its limitations. It can however be the building block for future works such as Budgets and Forecasts. These can help to plan for the future across a range of eventualities and business decisions.

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