A cash flow statement is a financial reporting document displaying the cash outflows and inflows of a company on a monthly or quarterly basis. This report reflects the effects of changes to the balance sheet and income accounts on the cash position as well as analyzing the operating, investing and other financial aspects of the company. When analyzed, the cash flow statement helps assess the short term capability and practicality of the company as to whether it will be able to fulfill its obligations to pay its bills or not.

Those who may be interested in studying the cash flow statement include:

-The accounting department

-Creditors and other lenders who need to assess the repayment capability of the company

-Investors who will judge whether the company is economically sound and viable

-Contractors and would-be employees who need to know whether the company will be able to fulfill its financial obligations

Companies that have limited fluid assets and which are just beginning operations are most in need of cash flow statements because they may be vulnerable and may experience cash shortfalls in spite of having healthy Accounts Receivables balances.

It is important to design a good cash flow statement that will translate the accrual basis of preparing an income statement as well as the balance sheet back into cash basis. The importance of this method is underscored when considering the fact that cash basis statements help in analyzing the actual amounts of cash flowing in and out of the business. Though the accrual basis may accurately reflect the company revenue and expenses the cash flow statement will additionally map out what happens when changes to the balance sheet are made. There are four different kinds of cash flow statements:

-Net cash flow statements that reflect operating activities. The generation of cash inflows and outflows that reflect the daily operating behavior of the business and includes cash received from customers, cash paid to suppliers and employees, and operating expenses, interests as well as taxes, and cash income received from dividend payouts.

-Net cash flow statements pertaining to investing activities. Mainly reflects the sale or purchase of equipment.

-Net cash flow from financing actions. Inclusive of common stock, short or long term loans changes as well as paid out dividends.

-Net changes in cash as well as marketable securities. To check whether the calculated amounts of increases or decreases in cash and marketable securities as arrived at from the above three points are in tune with those reflected in the balance sheet to help ascertain if the calculations were correctly made.

Though there are a number of different people interested in viewing the cash flow statement, each wanting their own perspective of the business, this financial statement is most important to management, lenders, tax officials and investors. The importance of this report is that it reveals the entire picture about the business and this is very helpful as it will reveal whether the business has enough cash or not to meet its obligations.

With cheap cash flow statement documents being available for as low as US$10 it is indeed a bargain to purchase one and use it for one’s business instead of going through the hassles of preparing one from scratch. These prepared documents usually take into account the various needs of different businesses and can also be tailor-made to suit individual needs.



Thanks to Wade Anderson for contributing this article to our Factoring blog:

Cash Flow Funding

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Medical Receivables Factoring

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Non Recourse Factoring

Previous studies have shown that stock prices are moved primarily by news about discount rates (expected returns). Applying Campbell’s (1991) variance decomposition framework to financially distressed firms supports this argument.

The central focus of the business plan must be the Cash flow Projections for your business. These cash flow projections will indicate to the banker the cash that you expect to flow into and out of your business during the start-up months and years.

The conventional valuation model used in Campbell’s (1991) framework suggests that stock prices reflect an infinite series of discounted expected cash flows. Hence, unexpected stock returns of a typical firm are driven by changes in expectations of cash flows and discount rates for all future periods. When a firm faces severe financial distress, however, the value of its stock is strongly driven by the likelihood that the firm will go bankrupt. Since this likelihood is directly affected by the ability of the firm to generate cash in the near future, any news about the firm’s cash flows should have a strong impact on its current stock price. Put differently, it is more likely that a firm will go bankrupt due to a decrease in its expected cash flows, rather than an increase in its discount rate.

This argument can be strengthened by taking into account the time series properties of cash-flow and expected-return news. As Campbell (1991) notes, expected-return news is dominant since changes in expected returns are more persistent than changes in expected cash flows. Hence, for firms with short life expectancies, such as financially distressed firms, persistence has less of an effect, implying a weaker (stronger) impact of news about future returns (cash flows) on current firm value.

The young start-up entrepreneur faces many difficult situations along the way to starting a new business. For example, what is the potential size of the market for the product or service? How is the product or service priced? Has a cash flow analysis been done so that the break-even point is determined? What is the break-even point? Will there be sufficient funds flowing into the bank .

The results show that the values of financially distressed firms are less sensitive to volatility shocks. This finding is consistent with the prediction that cash-flow news (relative to expected-return news) is more important for firms in financial distress than for healthy firms.

Cash flow is the life blood of any start up business. If your fledgling business does not have enough cash flow to get it through the first months of business then surely it will fail before it really has time to grow. Therefore it is very important to ensure that when setting your business plan you need to calculate and fund these costs. A large group of new businesses fail because of this and yet if they were to ensure cash flow in the start up phase then they might still be around today. So ensure cash flow is made a priority for your business.



Thanks to Gav Shannon for contributing this article to our Factoring blog:

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