A cash flow statement is integral to any business as it helps you understand its financial health. It enables you to budget for your business better by examining the timing of your cash flow.
The cash flow statement links the income statement and the balance sheet by studying the flow of money into and out of business. It will help you decide whether to contact a factoring in Ontario or not.
Not everyone in business has accounting or financing knowledge. Hence, it can be difficult for them to read and understand a cash flow statement. This article seeks to improve that by telling you all you need to read and understand a cash flow statement.
What is a Cash Flow Statement?
A cash flow statement explains what happened to a business’s cash during a specific period. It shows the business’s financial health in the short and long term.
A cash flow statement is usually broken into three parts:
- Cash from operating activities – It is the cash flow generated by the business in revenue and expenses.
- Cash from Investments – It is cash flow from buying and selling the business’s non-current assets. These assets include both physical and non-physical properties. Money from factoring in Ontario will fall here.
- Cash from financing activities – It is the cash flow from borrowing and paying back money to investors through the capital markets.
Cash flow in itself is not sufficient enough to determine the financial health of an institution. You should use it in tandem with the balance sheet and income statement.
How Cash Flow is Calculated
You can calculate cash flow using two primary methods:
The direct method is a simple method used to calculate operating cash flows. It is cash collected from operating activities minus cash disbursed from operating activities.
It is the more commonly used method of calculating cash flow. This method depends more on when cash enters or leaves the business.
How to Interpret a Cash Flow Statement
A cash flow statement seeks to highlight the financial health of an institution. It can reveal whether the business is growing, making a profit, or just declining and making losses.
A cash flow statement can be either positive or negative.
Positive cash flow.
A positive cash flow usually means that a business gets more money than it disburses for a specific period. It is usually a good thing as the company will have room to reinvest in itself, whether through settling debts or buying investments. You can use the money from factoring in Ontario to help maintain a positive cash flow.
Negative cash flow.
Negative cash flow does not necessarily mean a lack of profits. It usually means that a business is spending more money than it is making during a period. It can represent a mismatch in expenditure and income, which includes the business’s investments. It is not a situation you often want to be in.
A cash flow statement is an essential part of any business, and it is vital to be able to read and interpret one. It applies to business owners, managers, and investors. For the owner, it will help them know if their business is making profits or not and if they should hire or fire employees. The manager will use the cash flow statement to determine adjustments to their department to improve their financial health. An investor will use the cash flow statement to decide whether to invest in a business or not.