8 Critical Essentials for a Cash Flow Statement

First of all there are three key areas a cash flow statement reports on and they are the following:

  1. Operating activities
  2. Investing activities 
  3. Financing activities

They are either reported based on the Direct method or the Indirect method.

Some businesses prefer to be prompt with there understanding and use of cash and working capital needs, therefore they may be inclined to use the Direct method for their cash flow statement. Other firms may choose to us an accrual method where the net income of the business is adjusted based on the changed on the balance sheet to derive the three activities mentioned above.

Cash Flow Statement Key Line Items

“As I have mentioned before, an online accounting solution would make this process extremely easy

Net Earnings

Net Earnings is one of the main items in Income Statements and usually the most important line item in a cash flow statement. In an Income statement there is Net Income as the last line item to be reported, there is also net profit or bottom line, which are just additional terms used by some professionals to describe the same thing as Net Earnings. Ultimately they all mean the same thing really.

Depreciation and Amortization

In cash flow statements, depreciation and amortization is an expense account derived from the income statement. It is based on intangible assets which decrease in value over time. Though when the value decreases periodically over time it is called amortization. There is no tangible cash that is affected, the amount is a representation of the loss in value.

Changes in Working Capital

On a balance sheet there is current assets and current liabilities which when measured over and against time would provide either an increase or decrease in value. That change in value over time is called the working capital. A cash flow statement displays these changes clearly.

Investing in Plant Property and Equipment

The cash flow statement of certain companies show some form of plant, property and equipment. Some firms depend on a production plant, production equipmentv or property, relative to the type of business they are in. For businesses producing products or services, may need maintenance, replacement or upgrading of their PP&E (Plant Property and Equipment). Consequently the plant property and equipment of a company can either produce a loss of cash, due to purchasing or produce a gain, due to selling. Either way the intention of plant, property and equipment is usually ment to be operational for at least more than 12 months.

Issuance (Repayment) of Debt

When it comes to issuance (repayment) of debt, a company can either provide loans to it’s employees, other firms or individuals, as well as provide credit or advances to the same. Companies may also borrow and incur debt obligations which directly impacts cash.

Issuance (Repayment) of Equity

When it comes to issuance (repayment) of equity, a company’s owners or shareholders can either provide loans to the company or direct investments of cash to the company. Owners at some point will be fluctuating between these 2 activities and it does impact cash directly.

Net Increase (decrease) in Cash

This is what you need to know as a business owner. How much cash do you have based on your Operating activities, Investing activities and Financing activities. This is your net increase or decrease in cash. A critical and essential thing to know if you are in business. The importance of this is beyond obvious so I would spare the explaination.

Opening Cash Balance

The opening cash balance is usually stated in the balance sheet of a company called the opening balance sheet. When looking at financial reports, the opening cash balance refers to the first day of that report and the cash value recorded there for that point in time.

In Closing 

Cash is King. This is just a fact. If you are not paying attention to your cash movements into, through and out of your business, you shouldn’t be in one. Its that simple.

Knowing what is happening to your cash or how your business is using its cash determines how much you keep as net earnings  and ultimately cash in a bank account. Further in other posts we can get into Free Cash Flow to the Firm and Free Cash Flow to Equity.

Data Processing and Hosting Services

The Data Processing and Hosting Services industry provides infrastructure used for a variety of information technology (IT)-related activities, ranging from online hosting to automated data entry services.

Over the five years to 2021, businesses have increasingly outsourced their IT infrastructure needs, directly benefiting industry operators.

The advent and popularization of cloud computing, one of the industry’s fastest-growing product offerings, has similarly led to greater demand.

As a result, the industry has fared well during the majority of the five-year period, with revenue expected to grow at an annualized rate of 5.0% to $196.5 billion.

However, the COVID-19 (coronavirus) pandemic is expected to lead to a decline in business investment in industry services, although this was tempered somewhat by increased usage of industry services in other capacities.

Industry revenue is expected to increase 1.7% in 2021, as the overall economy recovers from the economic fallout of the coronavirus pandemic.

Profit is expected to decline slightly over the five years to 2021, as growth earlier in the period is countered by declines in later years.

Beef and Pork Wholesaling

The Beef and Pork Wholesaling industry has experienced favorable conditions over the five years to 2021.

The industry, which serves as the middleman between beef and pork producers and retailers, is expected to perform well as both consumer spending and consumption of beef and pork rises.

Prices of key inputs, such as corn and diesel, have risen during the five-year period, increasing operating costs.

Although operators have dealt with recent studies linking beef and pork consumption to heart disease and shifting consumers’ tastes, the industry has shown resilience as operations have expanded.

Revenue has been on a steady growth during the five-year period.

However, the restrictions placed on the economy as a whole due to the COVID-19 (coronavirus) pandemic led to a decrease of 0.9% in 2020.

This contraction in revenue was offset by the increase in per capita disposable income as a result of enhanced employment benefits and stimulus checks.

As the economy begins to reopen in 2021 and the easing of restrictions occurs, consumer spending is expected to increase due to pent-up demand.

Consequently, research estimates industry revenue to increase at an annualized rate of 2.4% to $91.4 billion over the five years to 2021, with a 2.0% growth in 2021 alone due to the expected economic rebound.

Beer Wholesaling

Revenue growth for the Beer Wholesaling industry has been hindered by shifting alcohol consumption trends among consumers, particularly millennials.

Americans have been consuming less beer and opting for alternative alcoholic beverages.

However, the industry has continued to benefit from laws that prevent the vertical integration of breweries and retailers.

After the Prohibition era, nearly every state enacted a three-tier distribution system, requiring three distinct levels within the alcoholic beverage supply chain, including producer, distributor and retailer.

As a result, beer wholesalers have a protected role, purchasing beer from producers before storing and transporting it to downstream retailers.

Research estimates that industry revenue has grown at an annualized rate of 2.3% to $82.9 billion over the five years to 2021.

Since 2020, the COVID-19 (coronavirus) pandemic has resulted in rising demand for industry operators, with revenue projected to rise 1.0% in 2021 alone.

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