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Cash Flow Statement

What is a Cash Flow Statement?

A cash flow statement is an account of the cash flowing into and out of a business over an accounting period, such as a month, quarter or year. The statement tells how the business used the cash generated during the time that the report covers.

Preparing a Cash Flow Statement

To prepare a cash flow statement a business will take note of the financial indices:

  • Operating activities that show the store’s income from the sale of stock.
  • Investment activities such as the sale or purchase of an asset like property or equipment.
  • Financing activities such as borrowings, repayments or investment from sale of shares.
  • Supplemental activity such as tax and interest payments that do not involve cash.

The business chooses a time period that gives a good idea of performance, such as a range of three or six months. The cash flow statement calculated from the financial indices show how the store is performing over the accounting period. A negative cash flow statement will have more money exiting the store’s accounts than coming in and a positive statement will show income exceeding outgoings.

A Clear Picture of Business Performance

Without an accurate cash flow statement, a store will not have a clear picture of how it is performing. It is very easy for a storeowner to see goods flowing out the door and plenty of stock coming in to replace it on the shelves. If they do not have account of the cash flow though, they will not know if the store is profitable, breaking even or possibly making a loss. The storeowner needs to know where the cash is going, what the cash coming into the tills is doing and if the store is meeting its expenses over an accounting period. A cash flow statement will tell the storeowner if income is converting to cash or if it is only exiting the store again to cover costs.

By looking at a cash flow statement, the owner will know how the business is performing and how it may perform in the future. It will allow the storeowner to plan for the business by knowing when income may increase and the periods when it will slow down. Very importantly too, a cash flow statement will tell the owner when to make any adjustments to how the store is running by highlighting problems of too high costs or of income lagging behind outgoings.

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