Managing a company’s cash flow can sometimes be complicated. Payment deadlines, suppliers to be paid, unpaid customers… It is easy to lose track of past or future cash. To help you see more clearly in terms of cash inflows and outflows, there is a practical (even essential) tool to put in place: cash flow tables.
Both used in the strategic management of a company and when raising funds, for example, cash flow tables can greatly facilitate the task of financial monitoring. What are the advantages ? How to build a cash flow statement? How to interpret the data and results?
Cash flow statement: definition
An essential financial document in the management of a business, the cash flow statement shows the cash inflows and outflows of your business during a given period , called the accounting period . This table groups together past cash flows and enables future cash forecasts to be established. It generally consists of three sections: operating activities, investing activities and financing activities. The total cash provided or used by each of the three activities is then added together to obtain the total change in cash for the period.
The cash flow statement demonstrates a business’s ability to operate in the short and long term with sufficient liquidity. Ideally, cash from your operating income should be greater than your net income. Thus, a positive cash flow is a testament to your company’s ability to remain solvent and grow its business.
Along with the balance sheet and income statement, the cash flow statement is one of the three most important financial statements for managing a company’s accounting.
Why make a cash flow statement?
Business leader, entrepreneur, investor… Knowing how to read and understand a cash flow statement is essential to know the financial health of a company . Because it represents a cartography of cash movements, the cash flow statement allows key decisions (commercial, strategic, investment, etc.) to be taken in an informed and enlightened manner. Thanks to it, it is therefore possible:
assess the cash flow variation generated by your company’s operations;
get a quick idea of the company’s financial health ;
analyze the company’s ability to finance its investments which generate a need for cash and to bear the cost of its commitments;
identify the company’s strategy (internal, external growth, etc.) and its impact on its future;
understand how the business generates cash and how it uses it year over year.
Guarantee of regular financial follow-up, the cash flow table is useful for many reasons: 1. A good indicator of your liquidity Thanks to the cash flow table, you are perfectly aware of the state of your cash flows. So you know what you can afford or not in your strategic choices.
Changes in assets, liabilities and equity You can quantify the amounts of outflows and inflows of funds and cash actually held by your company. These three categories form the accounting equation for measuring your business performance.
Forecast future cash flows You can use cash flow statements to create cash flow projections. This can allow you, for example, to establish your future business plans in the medium and long term.
Components of the cash flow statement
As its name suggests, the cash flow statement brings together all the cash flows (cash flow ) within a financial document and allows a company’s cash flow to be managed (cash flow management). In other words, it is a question of measuring the inflows and outflows of cash (net amounts) made by a company. We thus speak of “Cash in” for cash inflows and __ “Cash out”__ for cash outflows.
The different families of cash flows:
There are several categories of cash flow: cash flow from activity, cash flow from investment, cash flow from financing, self-financing capacity, free cash flow and change in working capital. . Let’s break down the ins and outs of each cash flow family.
Cash flow from operations (FTA) Cash flow from operations (FTA) details the cash flows generated after the company has delivered its usual goods or services and includes both income and expenses. It corresponds to turnover without integrating either investment or financing activities. This surplus therefore expresses the monetary value of the wealth created by the company. In particular, it makes it possible to repay loans, pay dividends, self-finance part of the investments, etc.
In most cases, operating cash flow comprises the bulk of your cash flow . If you are the manager of a restaurant, for example, the FTA is the result of your sales from which expenses are subtracted (related to raw materials, equipment, rent, payroll, etc.).
Investing cash flow (FTI) Investing cash flow incorporates cash flows from the purchase or sale of assets (physical goods, such as real estate or vehicles, and non-physical assets such as patents) using available funds, not debt.
To value FTIs, you can use this formula: Investment cash flow (FTI) = acquisitions of tangible and intangible fixed assets – acquisitions of entities (equities) + disposal of intangible and tangible fixed assets + disposals of entities (equities)
For VSEs and SMEs, FTIs generally constitute only a small part of your company’s cash flow. But you should still monitor it as it can impact your working capital.
Note: When you spend cash on an investment, that cash is converted into an asset of equal value. They have a monetary value, but they do not correspond to available funds (and in this context, the only assets that interest us are available funds).