If you’re either already running your own business or gearing up – one of the more important statements you can produce is a cash flow statement.

Cash flow is the life blood of your business and critical to being able to pay debts and survive, nay, thrive.

Poor cashflow is often cited as the most critical factor for businesses to prosper. Let’s unpack this critical aspect to business management.

What is cash flow in simple terms?

Cash flow is basically a measure of the flow of money in and out of your business. Revenue flows in while expenses flow out. This means that cash flow represents your ability to have enough cash on hand to pay for your bills and supplies while also generating a profit.

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What’s a cash flow statement?

In the realm of finance and accounting, the cash flow statement stands as a critical document for assessing the financial health and performance of your business.

Beyond profit and loss statements and balance sheets, the cash flow statement offers a comprehensive view of how cash moves in and out of a company over a designated period.

Why are cash flow statements so important?

Cash flow statements are a vital tool for businesses, providing insights into liquidity, revenue raising efficiency, and financial stability.

Unlike other financial statements, which may be subject to accounting adjustments, the cash flow statement focuses solely on cash transactions, offering a clear picture of your businesses ‘cash position’.

One of the main advantages of creating a cash flow statement is that it can help uncover discrepancies between reported profits and actual cash on hand.

While your business may generate significant revenue on paper, your cash flow could still be hampered by delayed invoice payments from customers (a major problem for cash flow), excessive inventory, or high operating expenses.

If you have issues with late payments or due bills, you can use your cash flow statement to identify problems early on and take actions to ensure your sustainability.

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What does a cash flow statement include?

Your cash flow statement typically consists of three main sections: operating activities, investing activities, and financing activities.

Operating activities

This section covers cash generated from the primary operations of your business. It includes cash you receive from customers, as well as cash payments to suppliers, employees, and for operating expenses such as rent, utilities, and taxes.

Investing activities

The investing activities section records cash flow related to the purchase and sale of long-term assets, such as property, plant, and equipment as well as investments in stocks or bonds.

Cash outflows in this section represent investments in the company’s future growth, while cash inflows indicate proceeds from the sale of assets or investments.

Financing activities

This section includes cash flow associated with your businesses financing activities, such as borrowing and repayment of loans.

Cash inflows from financing activities typically include proceeds from loans or share issuances, while cash outflows encompass loan repayments, share buybacks, and dividend payments.

When collecting customer data, be mindful of the government rules for data collection that apply to your state or territory.

How you can use your accounting software for cash flow management

In today’s digital age, accounting software has completely revolutionised the way your business can monitor and manage your finances. On top of core features like bookkeeping and payroll you can (and should) also use it to produce highly accurate reports like cash flow statements. Because your data is already in there, it’s a highly efficient process.

Here are some ways accounting software can help businesses effectively manage cash flow:

Real time monitoring

Accounting software enables you to track your cash inflows and outflows in real time, granting you total visibility on your cash balances and transactions. With such instant access to cash flow data, you can make informed decisions and take timely action to optimise your cash flow when you need to.

Automated Data Entry

Another advantage of software is the radical reduction in manual processes and error.

Manual data entry processes are highly prone to errors and inefficiencies, leading to inaccuracies in your cash flow reporting.

Accounting software automates data entry tasks, allowing you to capture and reconcile transactions seamlessly.

Cash flow forecasting

Cash flow forecasting is a fantastic weapon in your arsenal that you can use to anticipate your future cash needs.

Your accounting software can crunch your historical data and predict pretty accurate cash flow forecasts. This means you can plan ahead, see issues coming, and allocate resources effectively.

Integrate with your banking and payment systems

Many accounting software platforms allow you to integrate with your banking and payment systems, allowing you to streamline and automate your cash management processes.

By syncing your bank accounts and payment collections systems with your accounting software, you can automate bank reconciliations, track incoming and outgoing payments, and facilitate faster fund transfers.