Cash Flow Reporting

by Jeric P. Balisbis, CPA

Posted on 2021-01-19

A company’s ability to generate positive cash flows determine its ability to meet obligations and largely affects its status as a going-concern entity. While the net profit or loss performance is not enough to determine this ability, this information can be supplemented from a company’s cash flow report, thereby making it an integral part of management reporting.

The cash flow report also known as the Statement of Cash Flows, is one of the components of financial statements. Unlike the profit or loss report that measures the ability to generate profits, the cash flow report depicts the movement of cash inflows and outflows of a business during a given period.

Generally, the statement of cash flows provide a picture of the net cash generated from its operating, investing and financing activities. Consequently, it also shows the current cash position of the company which assists decision-makers to determine the optimum level of cash and working capital needed to support its operations. From here, the excess cash may be eventually used to invest in different securities to earn passive income, finance future expansion or engage in a new business venture.

The cash flow of the company directly affects its business decisions. Therefore, it is important to know how cash flow reporting influences the decision-makers of a company.


Detailed Movement of Cash

The report provides details of where money is generated or spent by the company. One example is the rate at which a company collects its receivables which does not appear in the profit or loss report. A company might generate enough profit but if the receivables are not managed properly, it might lead the company to be out of business. This happens when the company barely manages its cash. The company might need to revisit the collection efforts of its receivables and review the existing credit policies.


Short-term Plans of the Company

Every company has short-term plans for the business. These plans should be supported with a suitable projected cash flow based on the past cash flow reports of the company. This cash flow will assist the company to determine the needed cash to cover the operating expenses and pay its current obligations.


Focus on Creating Excess Cash

Making profits is important to businesses because it contributes more cash than what the company usually spends. But making profits alone, does not mean a company is without risk of failing. Some companies fail due to poor management of their cash. The cash flow report helps the company to manage cash through analyzing and determining the safety levels, optimum level of cash and working capital needed to maintain and eventually expand. For example, the company might need to collect what customers owe faster or use inventory more efficiently than before.


Long-term Plans

Like other aspects of business, a company should have long-term projected cash flow as well. Long-term financial planning gives the decision-makers the idea of whether the company can expand or enter into a new business venture. This is the time when the management decides on how to finance the plan. The company may opt to borrow money, use excess cash or sell more of its stocks to existing shareholders or to the public.


In every business, knowing the cash position and managing the cash efficiently of the company is crucial. Without enough cash to support the operations might paralyze the company and the worst case would be out of business due to lack of cash management. Being able to know how a cash flow report affects business decisions is as important as knowing the methods used to prepare a cash flow report. This is to determine which method is appropriate for the company.

There are two (2) widely-accepted methods used in the preparation of a cash flow report, namely, the (1) Direct method and the (2) Indirect method. The direct method is a more straightforward approach since it only accounts for the actual money coming in and out of the company. This method gives clearer views and more reliable figures since it reflects the exact amount of receipts and payments of cash. The method is also preferred because it is compliant with rules and accepted procedures of international accounting. But this method becomes complex and time-consuming when the company has a lot of transactions to process every day. And also, for publicly-held companies, this method might not appropriate to use since the company’s financial reports are publicly available and might take advantage of your competitors and potentially weaken your position in the industry.

While the indirect method begins with the net income then adjusted by any changes of all noncash accounts found in the balance sheet, adding any noncash expenses such as depreciation and subtracting or adding any gains and losses, respectively. This method is easy to use since most businesses keep their records on an accrual basis. However, the method lacks the transparency necessary to be compliant with international accounting standards.

The difference between the two methods lies only in one of the sections in the report and that is the cash flows from operations. The other two sections in the cash flow report, namely, the cash flows from investments and cash flows from financing, are calculated in the same manner regardless of the accounting method used by the company. Thus, any cash received from investment and financing is added while any cash payments are deducted.

Both methods mentioned above definitely provides the same amount of cash balance. But it depends on the company’s discretion on which method to use that will bring advantage to the business.

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