Cash Flow Reporting Explained
In this blog, we will be discussing what makes up cash flow reporting and how you can successfully track all elements to bring the greatest benefit to your business.
The Segments of Cash Flow Reporting
Money is constantly flowing in and out of your business, making it nearly impossible to remember every transaction. Trying to do so without proper tracking in place could spell trouble for your business. Luckily, this can easily be avoided, by embracing cash flow reporting and creating a CFS (cash flow statement), also known as a cash flow report.
Now, while not all businesses have to provide such a report in regards to their stationary financial statements, particularly those which are classified as “small” by the definition of the Companies Act of 2006, it could be requested of them by the directors. However, most companies MUST provide a cash flow report, and it must be reported accurately. If not reported accurately, there could be hefty legal consequences that your business could succumb to.
There are three segments to consider when implementing cash flow reporting. These three segments are: cash from operating activities, cash from investing pursuits, and cash from financing ventures. Today, we will cover all three of these segments so you can have a greater understanding of how useful a cash flow statement can be.
Operating activities are the flow of cash from day-to-day business operations and activities. Included in this is receipts that come from the sales of your products or services. The recordkeeping of documentation and invoices plays a crucial role in showing where revenue is generated from. The accuracy of this information is crucial in measuring profit margins of the business.
With regards to outgoing cash, it’s common knowledge that in order to make money, you have to spend money. The outgoing payments to your vendors for ongoing business operations, employees, and other expenses all contribute toward decreasing your net income. While payments to vendors and suppliers for materials have the same effect in terms of decreasing cash, the categorization of an expense account versus an inventory account should be carefully categorized for accurate reporting of your assets and liabilities. Payments to employees’ wages and/or salaries are also vital to have in the report, knowing what percentage of cash is going towards employee payments is critical to understanding the financial status of your business.
Imagine if upper management had no sense of just how much their employees were being paid, are they being paid too little? maybe too much? You need to find the perfect balance to keep employees happy with their income, but make sure it is not too much that it risks affecting the business’s capabilities to keep its door open and have those people employed to begin with.
Another piece of crucial information to put on the report is rent costs and utilities. Countless businesses pay rent to a landlord, as most do not own the physical property they operate on, making note of rent critically important as rent is going to be a massive portion of income spent for your business. Keeping track of rent costs allows you to seek out more cost-effective options that work well with your business’ burn rate without sacrificing the necessary space for your company to thrive and grow.
Although the outflow of cash is not always desired in cash flow reporting, when investment opportunities arise for a business, they can ultimately increase the value of the business indirectly. Investing activities include purchasing assets, mergers or acquisitions, and loans given to others with incoming interest. The investments a business puts in now towards assets is done in hopes of appreciating the value of the asset over time. Plus, as we stated prior, you have to spend money to make money.
In order for your business to expand you need to invest in assets, and keep track of them and their worth, as they can increase the value of your business. Another way for a business to grow is to merge with or acquire other businesses and watch the incoming assets closely as with all the hecticness of a merge or acquisition, they can fall through the cracks. Which can lead to an incorrect cash flow report. Also, be sure to keep tabs on any loans your business gives out and the money that flows in from the interest on it. This is vital for the cash flow report as it is a stream of income.
Tracking your business’s assets is of the utmost importance to your cash flow report. Anything in regards to the sale or purchase of an asset must be documented, and doing so greatly aids in the analysis of the net worth of your business. If you sold an asset at a gain document the ROI (return on investment). If you sold it at a loss be sure to put down how much you lost and when you bought that asset, how much you purchased it for.
Most businesses receive their income in more ways than just revenue from daily activities. Your businesses’ dealings with banks must also be well documented, whether that is taking out a loan for rent or purchasing inventory or equipment. Although the funds received from the bank are not considered income, the income received should be reported properly as liabilities, which also feed into the cash flow report under financing activities.
Banks are not the only way of having a source of cash in order to grow or run your business, in addition to banks, or as an alternative, many businesses turn to investors for cash. If you have a family member investing in your business, it must be recorded. Creditors and other potential investors have the right to know how a business is funded.
Depending on the size of your business, you may also have a number of shareholders. As part owners of the business, they are dependent on the company’s financial statements to be accurate to help make business decisions for further growth. . The payments of dividends and stock repurchases are also included in the cash flow report.
Cash Flow reporting is essential, not only for you to understand where money is coming in from and going out to in your business, but also for banks, investors, and even government agencies to understand. Keeping accurate records to track your operating, investing, and financing activities is a step in the right direction toward growing your business if one of your business goals is to expand by receiving funding from investors and banks.
We know that most business owners go into the business of what they are good at, and spending a considerable amount of time doing their own accounting and bookkeeping only further delays the growth of your business. While it is critical for your business to have cash flow reporting, sometimes it’s better to outsource these responsibilities to businesses whose expertise is in finance. Time is valuable, and more often than not the time saved by outsourcing is far more valuable than the cost of the service.
Looking for accounting support for your medical practice? Let’s chat.