Cash flow statements are essential for understanding how cash moves in and out of a business, providing insight into its liquidity, operational efficiency and overall financial health. By mastering how to interpret these components, you can gain insights into your company’s operational efficiency, its ability to generate cash, and its financial strategies.
Understanding Historical Cash Flow
Do you ever wonder why your bank account doesn’t necessarily reflect the profit of your business? If you are running your business based solely on deposits and withdrawals from your bank account, you may not have a clear picture of the actual profit you are generating.
Not all deposits into the bank account are considered income to the business. Some deposits may be refunds from vendors, loans received, or cash contributions from the shareholder. Some withdrawals may be shareholder distributions, loan payments, tax payments, or asset acquisition. None of these transactions are classified on the profit and loss statement – they are recorded on the balance sheet. A statement of cash flow will allow you to see all transactions from the balance sheet and the profit and loss statement.
Creating a budget is essential to understanding cash flow. Once a budget is created, you can determine how much income it will take to cover operating expenses. What most people omit from their budgets are the additional funds leaving the bank account. In order to determine future cash availability, we must also budget for distributions, tax payments, loan payments, and asset acquisitions.
Planning for Future Cash Flow
At Main Accounting Services, we focus on helping our clients understand both historic and future cash flow. After I graduated from college, my first boss told me, “Don’t tell me I got hit by a bus, tell me a bus is coming.” These words of wisdom have stayed with me throughout my career – and have been the driving force behind creating our firm’s FUTURE package.
With this robust model, we can reasonably estimate what a client’s bank balances will be in the future. Being able to predict how much cash they will have available at the end of any given month allows us to provide reliable indicators of when they may experience a cash crunch.
Done properly, a cash flow forecast is an invaluable tool for helping businesses stay on track and make informed business and investment decisions. In fact, we rely on the cash flow forecast report more than any other financial report to help us plan and replan each month.
Main Accounting Services understands the challenges and importance of maintaining solid financials. By providing insightful information, accurate and timely reports, and financial explanations customized to meet your needs, we are here to support your firm’s success and profitability. If you are looking for professional partners to help increase the success and profitability of your growing firm, click here to schedule a consultation.