In common parlance, cash flow is movement of money in and out of an organization, or an account. The concept of cash flow is not unheard of, but microanalysis of books of accounts has led to its widespread usage. The basic motive of conducting a cash flow analysis is becoming aware of the cash-related translations that have taken place in the recent past.
Cash Flow Statement
The cash flow statement is prepared by the accounts department and presented to managerial personnel for standard decision-making processes. This document basically contains two important categories, namely, the inflow of cash, as well the outflow of cash. It must be noted that 100% liquid cash figures are included in this statement. Thus, debtors (people who owe us money) , creditors (people to whom we owe money), credit card payments, etc., are not included in the statement.
The time frame for which the entire statement is prepared is a short, such as a week or a month. In contrast to the post transactional preparation (preparation of cash flow statement after the transaction), pre-transactional preparation (anticipatory preparation of cash flow statement) is also followed. Creditors, debtors, credit card bills, etc., are some elements that you can include in an anticipatory preparation.
Overall, an analysis of any kind of cash flow statement brings about the answers to 3 three important questions.
- How much is the total amount of inflow of liquid cash?
- How much is the total amount of cash that has been paid?
- Is the inflow and outflow of cash appropriate and profitable?
Understanding Cash Flow Analysis
As mentioned above, analysis can be done either at the beginning of the financial period, or at the end of the financial period. It is recommended that you conduct the analysis at both, the opening as well as the closing of the financial period.
- At the start of the month, take down the cash balance that has accumulated in the previous month. If this balance is negative, then you need to deduct it from the cash balance of the current month. Next anticipate the sales or rather the cash inflow, based upon that of the previous month. It would be wiser to estimate the sales as equal to that of the previous month. After this is done, estimate the expenditures that you have to pay off this month, it may include pay rolls, operational expenditures, etc.
- Next, you can also include debtors who are expected to pay up this month and creditors whom you have to pay up. In this manner you will plan all your expenditures and it would be healthy to respect this planning.
- The next step is to prepare the actual statement at the end of the month. In this step, all you will need to do is record all actual cash inflows and outflows in the statement.
- The next step is ascertain the increases and decreases. For this purpose, compare the anticipatory sheet and the one that you have prepared. An increase and decrease in the amount of sales is always possible by a rise or drop in sales.
- In the last step, three facts have to be derived. First, the percentage rise or fall in the inflow and outflow of cash. Secondly, increase and decrease in expenditures, either in a comparative ratio or a percentage. Third figure that you need to derive is that of the percentage increases and decreases of the sales, expenditure, and cash flow from both directions.
Once you are done with this analysis, you will realize three important facts, namely:
- The amount of rise or fall in cash inflow and outflow.
- The reason behind the rise in inflow and outflow.
- The methods then can be implemented to raise sales and curb expenditures.