Financial Data
Updated 27 Sep 2020

The statement of cash flows explained

In order to grow and sustain your business you need to continually track your cash inflows and outflows. Don’t get caught unawares, record your transactions by the use of cash flow statements.

If you like South African money and want to make more of it, you have to know and understand your company’s cash flow. Being able to internally generate sufficient cash is key to maintaining a healthy business.

Cash is the life blood of any business and it’s a crucial part of making investment decisions and critical for company survival and growth.

Companies that consume cash consistently are on their way to disaster. In this article we’re going to look at what cash flow statements are, what they look like and what they reveal.

What is a cash flows statement?Cash -flow -management _financial -management

A Cash Flow Statement is a month to month account of how your business is performing. See resources section for a business plan template to get you started.

By recording your transactions, money that goes in and out of your business on a monthly basis, you are able to tell whether your business is performing to your expectations or not

A Statement of Cash Flows serves as a map that tell you where the cash came from and where it went. A crucial planning tool for any business’s long term success.

A Cash Flow Statement provides you with details of cash generated and utilised by operations, investing activities and financial activities. This enables you to form a better assessment of your cash performance.

Information about your company’s cash flow will give you the aptitude to assess the ability of your business to generate cash for investment opportunities in South Africa and cash equivalents and the needs of your business to utilise those cash flows:

  • Repay loans
  • Fund expansion
  • Pay dividends
  • Enables analysts to understand how much profit is released in cash
  • Make use of various business opportunities in South Africa.

Cash flows are thus inflows and outflows of cash and cash equivalents. If you regularly do a monthly income statement you will be aware that there are certain items which may not affect your income statement (balance sheets are just a snapshot of what the firm is worth).

A cash flow statement will highlight these activities (like a camera recording a 12 month shoot of your business).

By keeping cash flow statements you are also recording the history of your business performance which will assist you should you need money from the banks to put into your business, as it will show you how much money you need, and for what reasons.

This is critically important for new and established South African entrepreneurs. Your banker will want to see a cash flow statement showing how you used the funds from a previous loan before they approve an extension or a new loan. Without a cash flow statement you have an incomplete picture of your business.

Sources of cash flow information

In order to compile a cash flow statement you need information. The following are some of the most important sources:

  • Cash book
  • Petty cash book
  • General ledger
  • Sales journal
  • Purchase journal
  • Debtors ledger
  • Creditors ledger
  • Fixed asset register
  • Journal
  • Wages and sales book
  • Stock records.

The cash flow statement formatCash -flow _money -flow

A statement of cash flows is a financial statement which summarises cash transactions of a business during a given accounting period. How does your business get cash and spend cash? There are three basic sources and uses of cash, namely, cash flows from operating, investing and financial activities.

It shows how cash moved during the period by indicating whether a particular line item is a cash inflow or cash outflow. Basically the cash flow statement is constructed by taking the latest two balance sheets and the income statement covering that period.

Cash flow from operating activities

Relates to the day-to-day running of the business and is often referred to as working capital. This is the cash generated from sales of products and services of your business.

A key indicator of the extent to which the operations of your business have generated sufficient cash flows to:

  • maintain the operations capability of your company
  • Pay dividends
  • Repay loans
  • Replace long-term assets
  • Make new investments.

Without recourse to external sources of financing. This cash flow is the only cash flow that is sustainable. If the company does not make surplus cash in this section, it is in a dangerous position.

Cash flow from short term operating activities should generally be positive to signify a healthy company. If your cash flow operations remain negative for too long, the confidence of investors and financiers will drop.

Examples of cash flows from operating activities:

  • Cash receipts from the sale of goods and the rendering of services.
  • Cash receipts from royalties, fees, commission and other revenue.
  • Cash payments to suppliers for goods and services.
  • Cash payments to and behalf of employees.
  • Cash payments for insurance, premiums, claims and annuities.

Cash generated from operations is recorded by adjusting operating income before depreciation, minus taxes and adjusted for changes in working capital.

Operating Cash Flow (OCF) = Operating Income (revenue – cost of sales) + Depreciations – Taxes +/- change in working capital.

Cash flow from investing activities

This section of the cash flow statement shows the amount of cash firms spend on investments. Relates to the sale and purchase of non-current assets (tangible assets and financial assets).

Investments are usually classified as either capital expenditures (money spent on items such as new equipment) or monetary investments (the purchase or sale of government bonds). This component would include:

  • Investment in plant and equipment or other fixed assets.
  • Nonrecurring gains or losses.
  • Cash receipts from disposal of shares, warrants or debt instruments of other enterprises and interests in joint ventures.
  • Cash advances and loans made by third parties.
  • Cash receipts from the repayment of advances and loans made by third parties.
  • Cash receipts for future contracts, forward contracts, and option contracts and swap contracts.
  • Other sources outside of normal operations.

This cash flow represents the extent to which expenditures have been made for resources intended to generate future income and cash flows.  You should always spend cash on investing activities as your company should at least maintain its assets. If you have a strategy for growth, your company should also acquire new assets, reflected in the cash flow statement.

Cash flow from investing activities is calculated by:

  1. Calculating the capital expenditures. These are expenses for additions to property, plant and equipment for the period.
  2. Calculate the proceeds from sales of long-term assets in the period.
  3. Calculate net long-term investments. These include purchases or sales of securities, acquisitions or sales of other companies, investments or sales of subsidiaries, loans to other companies and cash income received from investments.
  4. Calculate the cash flow from investing activities = Step 2 minus step 1

Standard -Bank -Did -you -know -banner

During the course of running and growing your business, you will need access to both short-term and long-term cash savings to pay salaries, suppliers, or even to save for a future project or large payment. Standard Bank provides a range of flexible Savings and Investment solutions, with competitive interest rates, to help you meet your business’s savings and investment needs.

Cash flow from financing activities

Relates to the issuing of shares, taking out of loans and repayment of loans. This is the cash to and from external sources, such as lenders, investors and shareholders.

This sections is important because it’s useful in predicting claims on future cash flows by providers of funds (both capital and borrowings) to your business. Examples include:

  • Cash proceeds from issuing shares or other similar instruments.
  • Cash proceeds from issuing debentures, loans, notes, bonds, and other short or long-term borrowings.
  • Cash repayments of amounts borrowed.

The cash flows from financing activities is one of the most important items on the statement because it represents a substantial source or use of cash that significantly offsets any positive or negative amounts of cash flow generated from operations.

You should investigate reasons for large positive or negative balances in the cash flow from financing activities, since it can, denote the need for a large loan to support ongoing negative cash flow from operations. Thus, if you see a large amount in this line item do immediate detailed investigation.

Cash flow format example

Cash Flow Statement

Things to note when preparing your cash flow statement:

  • If your make sales on credit, make sure you indicate the money on your cash flow statement ONLY when you expect to receive it.
  • Any savings you put into your business, or any loan (from a bank, friends or family) also amounts to cash received.

Fitting Cash Flow into the big picture of running your businessCash -flow -management _running -a -business

There is one rule for effectively running your business, do not run out of cash. To control your cash you must control cash inflows and outflows. To do this, you need a cash flow statement that will provide you with the cash-flow information you need. You can manage your cash flow better by:

  • Preparing and maintaining cash flow forecasts. This is a useful schedule prepared in advance to show estimated money coming in and money going out each month over a period of at least one year. Very important if you want to apply for business loans.
  • Set Cash Flow Targets. Set targets for credit controllers to ensure it receives the necessary attention it requires.
  • Reviewing your numbers regularly. You should monitor your expenses and sales daily. Monitor your business checking account, accounts receivable and accounts payable each week.
  • Improve receivables by improving the speed by which your turn materials and supplied into products, inventory into receivables and receivables into cash.

-       Offer discounts who pay their bills immediately.

-       Get rid of old, outdated inventory.

-       Issue invoices promptly and follow up immediately.

-       Make it very simple for people to pay by offering a range of payment options.

  • Increase sales.If you need more cash, attract new customers or sell additional goods and services to existing customers. Get better at managing your stock. Keep track of daily sales and make sure the items you have in store reflect this.
  • Keep your cost of sales as low as possible(i.e. materials, stock, labour). By lowering your cost of sales you will be increasing your gross profit margin.
  • Keep your monthly total expenses(water, lights, telephone etc.)as low as possible. This will increase your net profit margin.
  • Managing payables. Keep more cash in your accounts by staying on top of when payables are due. Any time and any place you see expenses growing faster that sales, examine costs carefully to find places to cut or control them.

-       Communicate with your suppliers so they know your financial situations. If your need to delay a payment, you’ll have their trust and understanding.

-       Pay on time and see if you can get a discounts for paying early.

  • Use technology to manage cash flow. Accounting software can help you simplify cash flow management by enabling you to monitor your inflows and outflows at a glance, view dashboards and reports, tracking when receivables and payables are due.
  • Train an employee to manage your cash flow. Allocate a dedicated person to track the money that’s going in and out. Train that person to keep a close eye on your daily credits and debits to ensure there is always sufficient cash in the bank.
  • Securing loans. Short-term cash flow problems may sometimes necessitate a business taking out a loan from a financial institution. Another option is a long-term amortised loan which includes interest and principal until the loan is paid off.
  • Keep the bank informed. If you see anything unexpected, let your bank know so there are no shocks. Keep your bank informed of any unforeseen outgoings and changes in forecasts, because the bank can offer useful services, like credit, business loans and overdrafts.

Factors to consider when drawing up your cash flow forecast

  • Seasonal fluctuations
  • An unexpected increase or decrease in sales or expenses
  • Price increases
  • Late payments by debtors
  • Emergency situation

Situations that can lead to cash flow problems:

Poor credit control. Not getting paid on time can be countered by having strict credit policies in place, and not being afraid of refusing work from large enterprises.

Order fulfilment. If you don’t deliver on time you will not get paid. Plan your workload properly and only accept orders you are capable of completing.

Ineffective marketing. Use marketing tools effectively by creating a marketing strategy and reaching your customers effectively.

Poor cash controls. Impose stringent controls on cash because it is an important survival tool.

Inefficient ordering systems. Make systems user friendly. Don’t subject customers to complicated procedures.

Poor management accounting. Proper record keeping is key to accurate accounting.

Inadequate supplier management. Suppliers might overcharge or take a long time to deliver stock. You need to create a system that will help you manage your suppliers.

Poor controls of gross profit and/or overheads. You should develop your own pricing model and prepare budgets to ensure that overheads are kept within targets.

Ensuring a steady cash flow is essential to your company’s success. Implementing effective controls over money coming in and going out can help your business generate substantial wealth. Remember, by building a positive bank balance, you can trade effectively and expand your business.