Keeping an eye on your business cash flow is without a doubt a key component to monitoring the financial health of your business. Running short of cash is one of the most common causes of business failure for start-ups.
The statement of cash flows, also commonly known as the cash flow statement, is the report of the cash generated and used over a determined period of time. At a quick glance, you will be able to tell where your cash was spent on and what is the amount of cash balance you have at any given point in time.
Do understand that the purpose of a cash flow statement is different from that of a profit and loss statement. Having a strong cash position does not equate to a profitable business. For example, the cash could be financed by a micro-debt the business has obtained recently. Conversely, your business may be profitable but the cash position can be weak. The reasons vary and only a deep analysis of the statements will be able to tell the true story.
The statement of cash flow is made up of the following components:
- Operating Activities – records cash inflows from sales and also outflows on expenses incurred in the process of running the business.
- Investing Activities – records cash inflows and outflows on the purchase or sale of assets not related to the day to day operation of the business. Some examples would be plants and equipment, property or investment activities.
- Financing Activities – records cash inflow and outflows related to business loans, paying dividends or issuance of stock to shareholders.
Savvy business owners and investors will utilize the cash flow statements to analyze the viability of the business as a going concern.
A cash flow statement can be easily generated by using accounting software. Or alternatively, you can engage accountants with the relevant expertise to prepare a cash flow statement for your business.
When in doubt, seek legal advice or consult an experienced ACRA Filing Agent.
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