Why prepare a Cash Flow statement
The cash flow statement is one of the three critical financial statements, alongside your income statement and your balance sheet. One look at
your cash flow statement should tell you whether your business is making more money than it is spending or vice versa.
There are three components that make up a cash flow statement.
- Cash flow from operations
- Cash flow from investments
- Cash flow from financing
Preparing the Cash Flow Statement
You can represent the cash flow statement using one of two methods: direct and indirect. The financing and investment components remain identical in both approaches. In the ‘cash flow from operations’ segment, the direct method positions gross cash receipts and gross cash payments against each other. The indirect approach, used by over 90 of companies, instead starts with the net income amount, then adds profits and subtracts losses.
The International Accounting Standards Board (IASB) recommends the direct method, but most businesses go with the indirect method.
For in-depth definitions and instructions on how to prepare a cash flow sheet for your business, download our Guide to Cash Flow Management today!