What is a cash flow statement? – Tips from an Outsourced CFO

A company’s cash flow, and thus the cash flow statement, consists of three elements – operating cash flow, investing cash flow, and financing cash flow.

What is a cash flow statement?

The first mentioned operating cash flow is formed when sales and other income of the company are subtracted from purchases and other cash outflows, i.e., operating expenses. Investing cash flow, on the other hand, indicates how much money the company spends on investments. Additionally, financing cash flow relates to all financing activities, such as loan repayments and dividends. The sum of these yields reveals how much money the company has in its cash reserves. Thus, this forms the cash flow statement, also known as a cash flow forecast.

For future plans and the company’s strategy, the cash flow statement is essential and helps the company understand the potential speed of growth. Additionally, emphasizing the cash flow statement can be beneficial for the company’s sales and support. Through the cash flow statement, business and finance can communicate with each other and make better, fact-based decisions rather than relying on gut feeling.

Why is the cash flow statement important for a company?

Forecasting your company’s cash position, i.e., having an up-to-date cash flow statement (or cash flow forecast), is arguably the most important calculation that the CEO and the board utilize. It integrates strategy, people, and the decisions behind them. Behind it all is an effective CFO who combines numbers and people. The root cause of a company’s financial challenges often lies in unexpected problems or difficulties with cash adequacy. Proper cash flow forecasting integrated into action and thereby the company’s financial management culture brings direct peace of mind to the company’s management.

It is often heard that accounting reports are “sufficient” for a company’s cash flow statement. However, this should not be the case because accounting reports (regardless of the system) provide retrospective calculations, rather than a forecast of how the company’s cash flow will form in the future. Moreover, when seeking external financing and considering it, a proper cash flow statement with accurate information is invaluable at the negotiation table.

How is a cash flow statement prepared?

Creating a cash flow statement can be done excellently at a basic level in an Excel spreadsheet. In practice, making a cash flow statement involves collecting the necessary information and adding them up. The cash flow statement collects information from sales, sales systems, other revenue streams, expenses (based on forecasts), finances, and future investments. As mentioned at the beginning of this article, the sections that make up the cash flow statement are operating cash flow, investing cash flow, and financing cash flow.

In what situations is the cash flow statement particularly useful?

The cash flow statement should be utilized in all of the company’s business decisions. The company benefits particularly from the cash flow statement when planning and making the following decisions:

  • Recruitment (e.g., summer employees) – how much investment is needed for recruitment? At what stage are the first salaries due, and have the employees “paid for themselves” by then?
  • Major investments – how will the company finance major investments? If seeking a loan or financing, what additional costs will be incurred?
  • Changing world situation (interest rates, inflation) – a familiar topic to us all in recent years.
  • Customer relationships and outlook – what is the customer attrition rate, and at what rate should new customers be acquired to keep the business positive?
  • Marketing – how much money is spent on marketing, and what does it bring back in terms of business?

How does Finaly leverage cash flow statements?

Finaly provides outsourced CFOs to companies, so we produce and utilize cash flow statements extensively in the operations of our client companies. Typically, we update the cash flow statement monthly together with our clients. In addition to this implementation, the service includes a current review of the situation and what measures should be taken to improve the financial situation of the client company. The cash flow statement should be interpreted continuously and systematically (at least on a monthly basis), and it should also be remembered that “no action, no changes needed” is a decision in itself. This should also be recorded to see what decision-making is based on and to provide the company’s management with peace of mind for decision-making support. All of these require a skilled and competent CFO.

If you need help with a cash flow statement or other financial matters of your company, please feel free to contact us. You can also schedule a discussion to delve into your company’s financial matters, such as cash flow forecasting and your future.

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