The company’s cash movement in one period is very important to report in order to know the performance of operational activities. The container used to report the movement of the company’s funds in one period is called cash flow.
The cash flow statement has its own procedure in its preparation so that information can be conveyed by stakeholders in a systematic manner. The role of the cash flow statement is important as one of the decision-making instruments in the future. The following is a full review of the cash flow statement.
Understanding Cash Flow Statement
The cash flow statement is a place to record the movement of cash, whether cash in or out of the company, at a certain period. Cash flow is a report that will describe how the company’s ability to generate income and pay obligations.
Broadly speaking, the contents of the cash flow statement are informational data regarding cash receipts and disbursements. The function of cash for the company is nothing but a source of funds to carry out operational activities.
In general, cash in the company is divided into 2 types, namely, petty cash and cash in banks. The cash flow statement will specifically contain the movement of all the company’s cash funds.
Furthermore, in cash flow, there are some basic elements that must be included. These elements will be explained in the following points.
Cash Flow Element
There are three basic elements contained in the statement of cash flows, namely operating, investing, and financing activities. These three activities are related to the company’s main operational activities to generate profits which of course have an impact on cash movements.
The first type of cash flow element is operating activities related to the payment of company obligations and receivables. The company’s obligations that must be paid using cash flows include operating expenses and payment of employee salaries.
Investment activities in the report describe cash receipts due to the company’s product sales process. In addition, there are also activities that cause a decrease in cash, but increase other assets. One example is buying a new machine.
The last element in the statement of cash flows is investing activities that relate to long-term investments. There are also funding activities marked by an increase in cash and long-term liabilities, one of which is borrowing capital from banks.
Cash Flow Goals
The preparation of flows as one part of the company’s financial statements is of course based on a specific purpose. Cash flow will help to know the condition of the company, from cash receipts and disbursements activities to operational activities.
The purpose of preparing a statement of cash flows is to serve as a basis for forecasting the future. This will relate to the decision-making that will be made by the company, based on the cash flow statement for the period.
The next thing that underlies the preparation of cash flow statements is to analyze the company’s ability to pay off its obligations. Cash is a form of asset that moves the most smoothly, so it needs to be reported so that it can be allocated properly.
The cash flow statement also has a relationship with the net income generated by the company in one period. Cash flow is useful for evaluating how the movement of the most current assets and its effect on net income received by the company.
The company can also determine the follow-up of long-term investment activities that will be carried out in the next period. The purpose of this report is to describe the company’s cash position in a simpler way, so that it is easy to understand.
Cash flow statement
Many things will be known by the company from preparing a cash flow statement in a certain period. The company will know how its financial structure is, both regarding liquidity and solvency in one period.
The company’s decision making in the future can also be analyzed in the cash flow statement. The amount of cash remaining in the period will affect the ability to carry out operating activities in the future.
In the process of preparing a cash flow statement requires a balance sheet in the previous period and the latest income statement. The company can also check the correctness of the preparation of the cash flow statement through the journal for the period concerned.
The company, of course, will not be able to develop its operational activities properly, without using cash. This asset is considered the most liquid because it is easy to liquidate to meet the company’s operational needs.
The parties who will take advantage of the cash flow statement are not only the company’s internal management, but also creditors, investors, and other parties. This will have an impact on the possibility of the company to increase profits in the next period.
Example of a Cash Flow Statement
|Cash in Hand (beginning of the month)||55.000||67.593||54.265||55.739||69.290||65.618|
|Cash Available (on hand + receipt, before cash out)||67.593||76.065||83.301||91.032||89.662||76.200|
|Cash Position (end of month)||67.593||54.265||55.739||69.290||65.618||51.413|
|Billing from Accounts Receivable Cash||4.498||3.493||1.987||1.029||2.911||4.234|
|Total Cash Receipts||12.593||8.472||29.036||35.293||20.372||10.582|
In the picture above there is an example for a cash flow statement. The template can be downloaded directly on Microsoft, please visit the following page => 12 month cash flow report
Cash Flow Statement Benefits
There are many benefits for internal and external parties of the company from this cash flow statement. The benefit of the first cash flow statement is that it helps provide information regarding the company’s ability to generate current assets in the next period.
External parties can also find out how much the company’s ability to pay dividends on the investment invested. The movement of cash flows in the report helps creditors to determine the company’s ability to settle its obligations.
The level of success of the company in one period can be measured systematically by using the cash flow statement. The entry and exit of these cash funds will help the company to find out the net profit obtained.
Cash Flow Classification
Classification of cash flow statements based on the flow consists of two kinds, namely cash inflows and outflows. Cash inflows are related to company transactions that generate income for the company.
Cash inflow transactions are related to cash receipts in the form of sales of production results. There are also other activities related to investment that generate profits. Cash inflow is also included in the company’s income due to the disposal of the company’s fixed assets.
The next cash flow is cash outflow which results in the expenditure of company funds. This form of expenditure can be used to finance operational activities as well as those related to the settlement of the company’s long-term obligations.
One example of cash flow expenditure to finance operational activities is the purchase of raw materials and payment of production costs. While the form of expenditure to pay long-term obligations is the payment of dividends.
Cash Flow Preparation Method
There are 2 methods used to prepare cash flow statements, namely direct and indirect. The two methods have fundamental differences in their preparation, especially in their components.
The cash flow statements through the two preparation methods have the same function, but the systematics are different. The following is a review of the two methods of preparing cash flow statements, both direct and indirect.
1. Direct Method
The cash flow statement is prepared using the direct method based on journals relating to cash and bank statements. This method uses information related to the company’s operating activities in its preparation.
The company’s receipts and expenses will be grouped based on operating activities. In the next section, cash receipts and disbursements from investing and financing activities will be recorded.
The cash flow statement using the direct method takes a little longer to detail the three elements of its activities. However, the results of the direct method cash flow statement can still be accounted for for its accuracy.
2. Indirect Method
The indirect method cash flow statement is prepared with three complete elements. The source of data from the indirect method of cash flow statements is the income statement for the period concerned. The income statement is used to determine the company’s net income.
The next source of data that is used as a benchmark in the preparation of the indirect method of cash flow statements is the balance sheet for the next period. The preparation of these cash flows is done by comparing the balance sheet and income statement.
The benefit of comparing data between the current income statement and the balance sheet for the next period is used to monitor the movement of cash-related instruments. Companies can also find out the rate of increase in cash-related instruments.
Cash Flow Component
There are several components of the cash flow statement that need to be included so that the results can contain all the elements properly. Each component in this cash flow needs to be understood especially when comparing balance sheets and income statements. The following is a review of the cash flow components.
Cash Flow From Business Activities
The first component of cash flow relates to the company’s business activities, namely profit. The recording can be done by looking at the income statement for the period in question to find out how much profit is earned.
The next step, the profit will be used as a benchmark to determine the development of the company. Profit will be accumulated with cash receipts and disbursements in a period to find the value added or subtracted.
The company’s net profit will be calculated to determine the cash value available to date. The decrease or increase in the value of cash itself will be influenced by operational activities that can affect the value of profits.
Cash Flow From Investment Activities
The increase in cash flow from investing activities was due to a decrease in the value of fixed assets. The opposite condition will occur if there is an increase in the value of fixed assets resulting in a decrease in cash flow.
A decrease in cash flow due to an increase in the value of fixed assets will occur because at that time the company declined. Each expenditure of company funds will result in a decrease in the cash balance, resulting in a decrease in the value of the flow.
The sale of fixed assets causes the company to receive an income of funds, thereby causing cash flow to increase. While the disposal of other assets in the form of equipment is not the focus of cash flow, but on the receipt of funds.
Cash Flow From Funding Activities
The company’s long-term obligations will be included in financing activities. The way in which the funding activity is recorded is carried out properly, that is, where the positive and negative balances are written as is.
As an illustration, a decrease in bank loans is one type of funding transaction that results in reduced cash. The transaction is written as a decrease in cash which is recorded as a negative item marked with a minus sign.
Transactions that increase the company’s capital are included in the category of increase in cash flow because it adds to the company’s funds. The increase in capital is recorded as a positive transaction which is written fairly, without using a specific sign.
The transfer of the long-term liabilities and equity columns in the balance sheet directly into one nominal column which is only distinguished by brackets. The different signs used to write the nominal will indicate the increase and decrease in cash flow.
Total Cash Activities
Total cash activities is the total value of the company’s funds from the three previous activities, namely operations, investment, and funding. The three activities will be summed to determine the increase or decrease in cash in one period.
As an illustration, the company has a decrease in cash due to operating activities of $ 6,000,000. In investing activities, the company also experienced a decrease in cash flow of $ 3,500,000. Meanwhile, in the company’s funding activities, the cash value increased by $ 11,000,000.
The next step that needs to be done is to add up the three cash elements. The sum of these three elements will determine the increase or decrease in cash flow.
The formula used to determine the increase or decrease in cash flow is quite simple, namely operating (activities+investing)+(activities+financing)-activities. From the sample company data, the calculation results from the previous example are: (6,000,000)+(3,500,000)-11,000,000 = 1,500,000
The results of these calculations indicate that the company experienced an increase in cash flow of Rp.1,500,000. The increase in cash value is recorded as a positive transaction in the company’s cash account.
Cash Beginning Balance
The last component in the cash flow statement is the cash beginning balance. The balance is obtained from the previous period’s balance sheet which will be used as comparison material.
In the process of recording this opening balance, the account of concern is cash only. The initial cash balance will be recorded in the first column in making a cash flow statement. Furthermore, the balance will be affected by transactions in other activities.
After that, the company only needs to add the initial balance with the increase in cash flow that has been experienced in one period. The results of the sum will form a new cash balance that will be used to carry out operational activities for the next period.
An increase in the gauze in the company will indicate that the business being run is experiencing growth. This can be used as a benchmark that the company will be able to fulfill every obligation in the next period.
Why is Cash Flow Important?
There are several things that underlie why the process of preparing cash flows is important to do. Many parties need a statement of cash flows of a business in one period for various purposes. It is important to prepare cash flows to meet these needs.
Judging from the company’s internal needs, the preparation of cash flows is important to consider in various needs in decision making. Here is a review of why cash flow is important, especially for internal companies.
The first reason underlying why cash flow is important is to control the company’s financial condition. Cash flow will help to describe the use of company funds in a period.
Finances will be well controlled through cash flow, so the company can make the best use of the funds they have. It is also intended to anticipate any unreasonable cash disbursements.
One type of financial report is also effective in providing information about the difference between net cash flow and net income. Net cash flow focuses on cash receipts and disbursements in one period, so that the current balance can be left.
Net profit is generated from all aspects of the company’s operational activities, which will later produce products, either goods or services. Sales of these goods or services will be used to calculate profit, plus various other operational aspects.
The last thing that underlies the importance of making a cash flow statement is to make it easier for companies to manage payables and receivables. The company will be able to predict its ability to pay off its obligations by analyzing cash flows.
Up to this point, do you understand the cash flow and preparation of the report? For the company this is very important and will have an impact on its development. Therefore, the report must be prepared properly.