If you’re starting a business in Nashville, one of the most important tools you’ll need in managing your finances is your cash flow statement. This report details your cash position at any given time and shows how money goes in and out of your business.
The cash flow statement may be prepared monthly, quarterly, semi-annually, or annually, depending on how often you need it. Your accounting firm can do the report for you, but you can also do it on your own, especially if you use accounting software, such as QuickBooks. Ask your CPA for guidance on how to set up your software and virtual books so you get accurate financial statements every time.
Why do you need a cash flow statement?
A cash flow statement has several uses:
- Financial planning
Your cash flow statement tracks the inflow and outflow of cash and cash equivalents in your business. It shows cyclical payment times and reveals cash-related patterns, including the peak and ebb of your cash position. You might see, for example, that scheduled expenses, such as employees’ salaries and rent and utilities payments, typically precede receipt of your receivables, so you can prepare for the situation ahead of time.
The ideal scenario is, of course, to have more cash coming in than going out, and your cash flow statement will reveal if you are achieving this goal. If not, you can use the report to guide you in creating a strategy to improve your profitability and fluidity.
- Attracting investors
The cash flow statement is one of the financial statements that potential investors look at to determine your business’s financial standing and see how well you manage your cash position. The report will show where your business is getting money from, and where and how money is being spent.
- Getting a loan
If you apply for a business loan, creditors will look at your cash flow statement to evaluate your liquidity – that is, if you generally have sufficient cash on hand to finance your operations and pay off your debts.
What are the components of a cash flow statement?
Unlike an income statement, a cash flow statement does not include non-cash transactions like depreciation, so it is more reflective of your business’s actual cash position.
The basic components of a cash flow statement include:
- Cash from operating activities
This covers actual payments for the goods and services you provide or trade in, less the payments you make to keep your operations going, including salaries for your employees, rent and utilities, and payments to your suppliers.
- Cash from investing activities
This includes the money you receive from your company’s investment activities, such as loan and interest payments received, or payment from the sale of an asset. Cash-out activities like giving out a loan or purchasing new equipment, properties, or other assets, are also reflected in the cash flow statement.
- Cash from financing activities
This includes money that comes in through loans, payments for issued bonds or sold shares, and other sources of capital. Payment for shareholder dividends or loan capital amortizations are considered cash-out activities.
If you want to learn more about cash flow statements and how they are prepared, get in touch with trusted Nashville accounting firm Evan Hutcheson, CPA, LLC.
Sources:
Why You Should Hire a CPA, BusinessNewsDaily.com
Why Small Businesses Need a CPA, TheBalanceSMB.com
Pro-Tip from a Nashville CPA: Take Advantage of These Exemptions
