How to Create a Cash Flow Report

Written by Trovata Team
April 27, 2021

What is a Cash Flow Report?

Cash flow is a key part of any operation. Sufficient funds moving in and out of your business demonstrates its liquidity and reveals important information about long-term stability. For lenders and potential investors, cash flow is a major factor they consider when deciding if they should invest in your company.

The Cash Flow Statement works as the link between your company’s balance sheet and income statement and indicates how much actual or anticipated cash is moving in and out of your business over a period of time. It keeps you updated on where funds are coming in and where they are being spent. As a result, the Cash Flow Statement helps you understand if you need to redirect or shift resources to better support your business decisions. 

There are two methods of reporting cash flow: direct and indirect. The direct method reports gross cash inflows and gross outflows from operating activities. The indirect method adjusts net income for deferrals, accruals, and items that affect investing and financing cash flows, thus reconciling net income with net cash flow from operating activities. 

Because it is easier to derive from existing accounts, the indirect method is used by almost all organizations.

The cash flow reporting provides a snapshot of your company’s finances and is a critical resource for understanding your company’s health and stability.

Understanding a Cash Flow Statement

An accurate cash flow report helps you and investors target potential trouble spots in order to maximize positive cash flow, which is the ultimate goal of any business. The remaining funds from positive cash flow can be directed to expansion, growth plans, or dividends. 

In order to accurately track and manage all cash inflow and outflow, the Cash Flow Statement is broken up into three specific types of activities: operating activities, investing activities, and financing activities.

Operating Activities

Whatever your company’s products and/or services entail are tracked in the operating activities section of your Cash Flow Statement. In this section, you will see the revenue generated by sales as well as any costs of production and distribution. When constructing your Cash Flow Statement, anything that you cannot classify as investing or financing activities would be included here.

What’s considered an inflow of cash?
  • Cash collections from sales
  • Accounts receivable
  • Any settlements from lawsuits or insurance claims
  • Any refunds received
What’s considered an outflow of cash?
  • Employee salaries
  • Payments to suppliers
  • Any fees or fines incurred
  • Any lawsuits settlements paid out
  • Cash interest payments to lenders
  • Charitable contributions
  • Any cash refunds distributed
  • Any settlements of asset retirement obligations

It’s important to remember that depreciation, equipment and inventory costs, accounts receivable and accounts payable can impact costs related to production and distribution.  

Operating cash flow provides a clear picture of business operations. If a company is not bringing in enough money from operations, they will need funding through financing or investing, which is not a long-term solution.

Investing Activities

Cash flowing out of your business that can be traced back to capital expenses used to facilitate your business’ success will be documented in the Investing Activities section. These activities include the sale of assets or other investments and the purchase of property, equipment, vehicles, stocks, and bonds.   

Any changes in cash flowing out from your business that can be traced to capital expenses will appear in the Investing Activities section of the Cash Flow Statement.

This section is helpful for business owners as it provides insight into the ROI of its decisions over a certain period of time.

What’s considered an inflow of cash?
  • Cash receipts from the collection or sale of loans
  • The sale of long-term and fixed assets
  • Any proceeds from insurance settlements related to damaged property
  • The sale of securities issued by other entities
What’s considered an outflow of cash? 
  • Cash payments for loans
  • The purchase of fixed assets
  • The purchase of debt or equity of other entities

While a negative cash flow often indicates poor company performance, negative cash flow from investing activities might be a result of cash being invested in the long-term health of the company.

Financing Activities

The Financing Activities section of your Cash Flow Statement focuses on how your company raises capital and pays it back to investors through capital markets. It identifies the sources and uses of a company’s cash and allows investors to see how frequently and to what extent a company raises capital and also from where that capital originates.   

What is considered an inflow of cash?
  • Cash received from issuing stock
  • Cash received from issuing debt
  • Proceeds received from employees who exercise their stock options
  • Cash received from issuing hybrid securities, such as convertible debt
What is considered an outflow of cash?
  • Cash spent to repurchase shares of stock
  • Repayment, or paying down of, debt
  • Payment of cash dividends to shareholders

When this number is positive, cash has come into the company, which boosts asset levels.  When negative, the company has paid out capital, like long-term debt.

If a company issues new stock often or takes out new debt frequently, it may not be attractive to investors. When a company’s cash comes from normal business operations, however, investors are more likely to seize the opportunity…..

Cash Flow Report Example

This simple Cash Flow Statement demonstrates how powerful this tool can be for determining the health of any company:

Cash Flow Report Example

A thorough financial analysis will include a close examination of the Cash Flow Statement in tandem with the balance sheet and income statement.  This will provide a complete diagnostic of a company’s financial health.

How Automation Can Help

The Cash Flow Statement is one of many resources your company will use to make critical decisions driving the next steps of your company. Trovata’s automated Cash Reporting platform will not only save time and reduce human error, it will help your company categorize and sort cash flow types. 

To see how Trovata optimized cash flow analysis with automated cash reporting, check out the Emerald Expositions Case Study.

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