A Statement Of Cash Flows Using The Indirect Method Beyond Taxes – How Your Cash Flow Statement Can Help You Run Your Business

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Beyond Taxes – How Your Cash Flow Statement Can Help You Run Your Business

Cash flow statement is made up of three sections. The first segment is operating activities. Operating activities include your company’s profit or loss and non-cash items that affect your profits without affecting cash. Examples of this type of non-cash expense are depreciation and bad-debt expense. This section also covers changes in your operating assets and liabilities. Operating assets and liabilities include accounts receivable, prepaid expenses, accounts payable, and accrued liabilities. A common feature of operating assets and liabilities is that the period in which these items are reflected in the profit and loss statement is different from the period in which they were incurred.

The second section of the cash flow statement is investing activities. Investing activities are assets such as property and equipment or borrowings. An interesting aspect of investing activity assets is that they, unlike operating assets, generally do not affect the profitability of the company. In other words, investment property does not represent revenue or expense items.

The third and final section of the cash flow statement is financing activities. Financing activities are debt and equity items. If you increase or decrease your debt, that change is included in financial activity. Equity changes such as capital contributions or shareholder distributions are also reflected under financing activities. Unlike investing activities assets, financing activities do not represent liabilities and equity revenue or expense items.

The sum of the three sections: operating activities, investing activities, and financing activities is your cash flow when reported. A positive number indicates an increase in cash and a decrease indicates a decrease in cash. Now it’s time to take a closer look at the cash flow statement and see why your cash flow differs from your profit.

Compare your cash flow to your profit. If your cash flow is greater than your profit, you are either shedding assets or increasing your debt, which is negative for your business. On the other hand, it could be that you are increasing your capital, which is positive for your business.

If your cash flow is less than your profit, you’re building up your assets, such as buying property and equipment for future growth or paying off your debt. Both of these are positive for your business. But it could mean your money is tied up in accounts receivable as collections deteriorate and your business weakens. Or it could be that you are depleting your capital, which is negative for your business.

Cash flow is an indicator of where you are spending your money and the future strength of your business. Small business owners don’t realize the importance of comparing their cash flow statements to previous years to measure their business growth. Some of them are unaware of the basic rules that should be followed to compare with their past cash flow statement. So now that you know these formulas, take a few minutes and review your cash flow statement. Compare with the previous year and see how your business is progressing. You’d be surprised at how much valuable information your cash flow statement contains.

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