Cash Flow Reporting Basics

Written by Trovata Team
April 29, 2021

A tech enterprise offering its application under a subscription plan has specific financial responsibilities. These responsibilities include determining its expenditure to keep its app running and how much money is coming in from subscribers, and what’s in the bank. To ensure its application is never delisted by its hosting or cybersecurity partners, the enterprise must be aware of its cash position’s ability to pay its bills. Thus, it must continuously create a cash flow report for specific durations. 

Like the example above, a cash flow report refers to a report or statement that accounts for an organization’s inflow and outflow of cash within a specified duration. Cash flow reports are also mandatory financial reports in most countries. In the United States, the Financial Accounting Standards Board lists cash flow reporting alongside the balance sheet and income statement as compulsory accounting reports for enterprises. 

Why is Cash Flow Reporting So Important? 

First, a cash flow report shows you how much cash is available to keep your business in operation. Unlike income statements that tell you how much money a business has made and spent, cash flow reports let you know the exact amount of cash you have in hand at a particular time. 

How is Cash Flow Reporting Done?

Income statements and balance sheets play important roles in cash flow reporting. An income statement highlights how much cash a business has made and spent, while a balance sheet covers a company’s assets, liabilities, and shareholder’s equity at specific points. 

Cash Flow Reports = Income Statement + Balance Sheet

To create a cash flow report, you will use the information from your income statement and your balance sheet to determine your cash position. This information includes; cash flow from operating activities, cash flow from investing activities, and cash flow from financing activities. 

  • Cash flow from operating activities – This refers to the cash earned and spent from conducting everyday business transactions. Using the aforementioned example on the tech company, cash flow from operating activities is the cash earned from app subscribers and the cash spent on hosting the application.  
  • Cash flow from investing activities – This refers to the cash earned on investments and the cash spent on investments. For example, if the cash spent on purchasing cloud infrastructure is $10,000, you spend $10,000 cash but gain a $10,000 asset. The $10,000 investment is then deducted from cash on hand from the cash flow report because it isn’t available as cash. 
  • Cash flow from financing activities – This refers to the cash earned or spent to finance your company. Cash flow from financing activities includes loans, credit, and equity from stakeholders. For example, if a loan is taken or an investor extends credit to purchase an app development kit, you receive cash in your accounts. This cash is reported as cash on hand.

The Two Methods for Calculating Cash Flow

As stated earlier, cash flow is calculated by adding income and subtracting expenses resulting from transactions that occurred within a specific duration. In some cases, transactions that do not involve cash, such as providing consulting services in exchange for subscription fees, may occur. These transactions must be evaluated and included under cash flow from operating activities. 

The intricacies of calculating cash flow, such as the need to evaluate the cash value of specific transactions, are why two calculation methods exist. These methods are:

  • The Direct Cash Flow Method – The direct cash flow calculation method adds up all the cash payments made within the period in review and all the cash paid out within the stipulated duration. This method determines the net decrease or increase across an enterprise’s financial accounts. 
  • The Indirect Cash Flow Method – The Indirect method starts by considering the net income of an enterprise income statement, and adjustments based on earnings before interest and tax, cash evaluation, etc., are made to it. The adjustments ensure accuracy when calculating the final net income of your enterprise.  

Using the tech enterprise as an example, here is a representation of its cash flow report using the indirect cash flow calculation method.

cash flow report

The above cash flow report shows the tech enterprise in a healthy cash position as its earnings from operations outweigh its cash flow from financing. The company also has cash from its operations to invest in its infrastructure, thus highlighting its healthy financial state to potential investors. 

Who Creates and Reviews Cash Flow Reports?

Traditionally, the responsibility of creating a cash flow report generally falls to the financial planning and analysis department, where finance professionals are tasked with the calculation process. But today, the treasurer is expected to be involved with the cash budgeting process, where cash flow reports have important roles to play in determining strategy for businesses. As a result, treasurers are increasingly participating in creating cash flow reports to integrate them into their risk management and forecasting activities. 

From the example above, it’s easy to note that enterprises with multiple bank accounts where thousands of transactions occur produce large data sets that must be integrated into cash flow reports. Unfortunately, the cash flow reporting processes at these types of enterprises is a time-consuming activity when done manually. Today, the application of digital transformation technologies such as open-banking APIs and data analysis tools can be applied to automate the cash flow reporting and cash flow forecasting process. 

Ready to Save Time by Embracing Automation? 

Download our guide “Building Tomorrow’s Treasury to learn more about digital transformation, and the technology that is helping treasury professionals increase the efficiency and accuracy of the cash flow reporting process. 

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