Tag Archives | cash flow statement

Cash Flow vs Net Income

See Also:
Operating Income (EBIT)
Free Cash Flow Analysis

Cash Flow vs Net Income

What is Cash Flow?

Cash flow is the blood of a business. It is the measure of what cash is coming in and what is leaving. Cash flow is a more accurate measure of whether a company has enough capital to sustain itself. For example, a company can be extremely profitable and still go out of business due to poor cash flow.

In planning a new business, cash flow is still a very important concept to focus on. Different services and habits affect cash flow. For example, a company’s payment terms greatly affect the amount of cash flowing in and out of a business. If it gives terms that are long, the business could have trouble meeting its other financial obligations. If the terms are short, it can give the business terrific cash flow.

The difference in length of terms comes down to the sizes of accounts receivable and inventory. If a business’s accounts receivable is high relative to its revenue, it is a sign of cash flow problems. Furthermore, if a company has a large inventory account, it can also be a sign of poor cash flow. A large inventory could show a purchasing problem that siphons cash faster than it is needed. Either way, if a business has too much tied up in inventory, it causes cash flow problems. The balance sheet and income statement might show a profit, but cash flow shows whether a business can sustain itself.


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Cash Flow Statements

Cash flow statements are broken down into three areas. The areas are operating activities, investing activities, and financing activities. The idea behind separating these sources of cash is to get a better idea of where the cash is coming from. A detailed cash flow statement shows what amount came from loans, products/services, and investments. This can be very useful to investors and lenders.

What is Net Income?

Net income is calculated by subtracting total expenses from revenue. This is the ‘profit’ that most people refer to. Within the total expenses to be subtracted from revenue, overhead and cost of goods/services are both included. This means that net income is the measure of whether a company actually made money during a period. Due to accrual accounting, net profit does not automatically mean a business has cash. However, net income is efficient at tracking business done within a period. This makes net income a better estimate of profitability than cash flow.

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Cash Flow vs Net Income
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Cash Flow vs Net Income

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Prepare an Investor Package

See Also:
How to Prepare a Breakeven Analysis
Contribution Margin
Cost Volume Profit Model
ProForma Financial Statements
Net Profit Margin Analysis

Prepare an Investor Package

The Investor Package serves as a medium to visually communicate to the Owner/Management financial information which they might otherwise have difficulty digesting in financial statements. This is not unusual since many entrepreneurs have a better intuitive grasp of the financials rather than an analytical understanding. A secondary benefit to prepare an Investor Package is that the preparer is able to share this information with banks, suppliers or any other concerned parties.

The impact of the Investor Package contrasts with the effort to create it. Based on historical experience, the Owner/Management appreciated the value of the Investor Package more so than the many analyses and hard efforts put forth for other projects. Much of this has to do with how the graphical nature of the Investor Package allows the entrepreneur to intuit the financial statement.

At it’s core, the Investor Package is collection of graphs that tells a story about the company’s financial health.

The biggest challenge to setting up the Investor Package is access to good information. The most important inputs are current and projected monthly financial statements. This means that you may need to finish certain projects before you can start on the Investor Package. Once complete, it will be necessary to maintain the graphs by inputting the information in on a monthly or quarterly basis.

Accumulate Info

In order to successfully create the Investor Package the company’s financial information will need to be gathered and/or created: Current Monthly Financial Statements (Balance Sheet and Income Statement), Updated Cash Flow Projections (Balance Sheet, Income Statement and Cash Flow Statement) and Financial Statements from last 4 years (Balance Sheet, Income Statement and Cash Flow Statement). Note: This is optional depending on whether or not you would like to bring in historical financials as a comparison to current fiscal year performance.

Input Financial Info

Once you have gathered and/or created all the necessary financial statements, it will now be time to enter the appropriate data into the template. The 10 core graphs in the Investor Package all draw from the following information: Revenue, Net Income, Working Capital, Debt to Equity, Accounts Receivable, Days Accounts Receivable Outstanding, Inventory, Cost of Sales, Average Days in Inventory, Current Month Balance Sheet and Current Month Income Statement.

Customize Graphs

Determine what graph(s) you want to include in the Investor Package. Determine what additional information you will need: Do you need to create a new table for inputting the data? Will it be possible to use existing information already there? What 4-year historical information will you need (if any)? Create a new input table as necessary in the Input Section. Key in the appropriate information into their respective tables in the Input Section. Create a new graph in Excel and link to the appropriate cells in the Input Section.

Maintain Monthly/Quarterly

Once you tailor the Investor Package to meet the company’s needs, you have set up the basic infrastructure. The task will now shift to maintain the package by continuously updating it with current financial information. Maintenance should be done on either a monthly or quarterly basis.

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Prepare an Investor Package

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International Financial Reporting Standards (IFRS)

See Also:
Financial Instruments
Finance Beta Definition
Generally Accepted Accounting Principles (GAAP)
Financial Accounting Standards Board (FASB)
Financial Ratios

International Financial Reporting Standards (IFRS)

The International Financial Reporting Standards (IFRS) are a set of rules and standards for preparing financial statements. An organization called the International Accounting Standards Board (IASB) issued the IFRS.

The goal of the IFRS is to standardize the regulations and procedures for financial statement preparation around the world. Currently, many countries have their own sets of standards for accounting rules and regulations for financial statement preparation. Furthermore, across the globe, many countries are beginning to conform to the IFRS.

IFRS standards apply to financial statements such as the balance sheet, the income statement, the statement of cash flows, a statement of owner’s equity, and accompanying notes to financial statements. Furthermore, the IFRS cover such things as underlying assumptions and qualitative characteristics of financial statement preparation. The IFRS also covers the basic elements of financial statements – assets, liabilities, equity, income, expenses – and the proper way to recognize these elements.

IAS – IFRS

The IFRS were established in 2001. Prior to that date (from 1973 to 2001), the International Accounting Standards (IAS) were the set of rules and regulations recognized worldwide. Then the IAS was incorporated into the IFRS.

International Accounting Standards Board (IASB)

If you want more information regarding IASB and IFRS, then go to: iasb.org

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International Financial Reporting Standards

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International Financial Reporting Standards

Further reading

Original texts of IAS/IFRS, SIC and IFRIC adopted by the Commission of the European Communities and published in Official Journal of the European Union http://ec.europa.eu/internal_market/accounting/ias_en.htm#adopted-commission

International Accounting Standards Board (2007): International Financial Reporting Standards 2007 (including International Accounting Standards (IAS(tm)) and Interpretations as at 1 January 2007), LexisNexis, ISBN 1-4224-1813-8

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Cash Flow Projections

See Also:
Cash Flow After Tax
13 Week Cash Flow Report
How to Produce Realistic Sales Projections
Optimistic Projections
Why Most Sales Projections Fail

Cash Flow Projections

Financial statements are the basic building block for understanding how a business is doing. They provide management a way to assess the results and consequences of past decisions. However, because financial statements reside in the past, they are of limited use when used to forecast the future. While there does not exist a fool-proof way to forecast the future, there does exist a reasonable best-guess method to forecast how things may turn out. This is where financial projections come in.

Like historical financial statements, there are 3 basic financial projection reports: Projected Income Statement, Projected Cash Flow Statement and Projected Balance Sheet. Dynamic cash flow projections model is an important tool for managing your business.

Most professionals will produce projected income statements. Some will produce projected cash flow statements. However, few will do projected balance sheets! A complete set of financial projections is very important to keep and maintain.


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Income Statement Projections

A projected Income Statement provides management an idea of how the company’s profitability will look 12 months into the future. This projected profitability rests in large part on management’s ability to forecast industry and customer demand, costs, as well as many other macro and micro economic factors.

Cash Flow Statement Projections

The cash flow projections provides management with an idea of how the firms liquidity will be impacted given the business assumption inputs for the Income Statement projection. The projected Cash Flow Statement seeks to answer the following questions:

Balance Sheet Projections

The projected Balance Sheet allows management to know the state of its asset, liability and equity base. As business expands or contracts so too will the firm’s assets, liabilities and equity. The projected Balance Sheet allows the company to project debt levels and covenants.

Cash Flow Step by Step

In order to successfully create financial projections, gather a variety of information. It is important to obtain the most recent and up-to-date information as all projections of the future are grounded in the past.

In other words…Garbage In Is Garbage Out! Done correctly, you will only need to do this once. However, if you come to find out that there are pieces of information missing, you may need to adjust accordingly. Someone in accounting, preferably a person who has access to the most current financial statements.

Income Statement Projections

After you have finalized the entries for the assumptions page, the next task at hand will be to tackle the Income Statement projections. Of all the projections you do, this is one that receives the most attention. The Income Statement projection can serve as a budget as well as a tool for management to analyze various business scenarios.

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accounting income definition

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Cash Flow Statement Example

See Also:
Cash Flow Statement
Statement of Financial Accounting Standards (SFAS)
What is GAAP?
Daily Cash Flow Forecast
Prepare an Investor Package

Cash Flow Statement Example

For example, Saundra has started providing angel investment to promising start-up businesses. Operating under the name Angelco, she is using the wealth she built in her professional career to provide a chance of success for up and coming Entrepreneurs. Saundra also is not afraid of the returns she will make if one of her portfolio companies were to succeed and reach capitalization.

Saundra has a job which requires constant due diligence. She must constantly monitor the companies she has invested in to ensure the professionalism with which she personally conducts business. As a result, she must constantly monitor financial statements. One such statement of monumental importance is the cash flow statement. Saundra survives, in part, through her skills of cash flow statement analysis.

Recent Changes of Balance Sheets

First, Saundra wants to know how recent changes to the balance sheets of her companies affect cash and similar assets. To do this she looks to the most recent cash flow statements which were sent to her. Upon inspection Saundra finds that three of her five companies are performing well and cash is increasing as income in the fledgling companies begins to outpace costs.

On her fourth company she does not see this result. Saundra understands that this could be the result of any number of reasons; slow growth, one-time problems, or poor management. Saundra has set a policy of allowing a grace period for problems to be rectified. Beyond this period, she will have to step in and replace current managers with her own team.

For her fifth company Saundra comes to the conclusion, after looking through her files, that she has not received a cash flow statement. She fears she may have to get tough with these founders but continues her analysis.

Monitor Financing, Investment, and Operational Performance

Saundra also wants to monitor the financing, investment, and operational performance of her companies. Again, she looks to the cash flow statement for this. Saundra, once again, is impressed with how her first three companies are controlling these actions. For her fourth company. she sees the core problem. They have purchased equipment at a price higher than average to the market. She notes that she must contact her managers to correct their mistake. With any luck, the equipment can be returned and purchased at a lower price, fixing both financing and investment issues in this business. She, of course, could not monitor this information with her fifth company.

Cash Flow Statement

Saundra has used the cash flow statement effectively because of her knowledge into the importance of the statement. Her experience combined with her analytical nature allow for effective monitoring of the big 3 financial statements: cash flow statement, income statement, and balance sheet.

Cash Flow Statement Example, Cash Flow Statement

cash flow statement example, Cash Flow Statement

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Cash Flow Statement

See Also:
Financial Ratios
Cash Flow After Tax
How to Create Dynamic Cash Flow Projections
Steps to Track Money In and Out of a Company
EBITDA Definition

Cash Flow Statement Definition

The cash flow statement definition is a financial statement that shows a company’s cash inflows and cash outflows over a period of time. The cash flow statement is one of the most important financial statements of a company. The balance sheet includes an asset account labeled “cash.” The statement of cash flows shows how the company’s operating, investing, and financing activities affected the cash account during the fiscal period. In conclusion, use the statement of cash flows to analyze the financial health of a company.

Cash Flow Statement Explanation

Cash flow statements divide a company’s activities into three categories, including the following:

  • Operating activities
  • Investing activities
  • Financing activities

Operating activities refer to the company’s core business operations. Whereas, investing activities refer to changes in long-term asset and investment accounts. Financing activities refer to changes in debt and equity accounts. Furthermore, the statement details the cash inflows and outflows for the accounts in each category over the course of the fiscal period.

The bottom line of the cash flow statement, which accounts for the net cash inflows and outflows of all accounts during the fiscal period, must equal the balance of the cash account on the balance sheet.

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Cash Flow Statement: Direct Method VS. Cash Flow Statement: Indirect Method

There are two ways to prepare the operating activities section of a cash flow statement, including the following:

  • The direct method
  • The indirect method

Apply these methods only to operating activities. Always prepare investing activities and financing activities the same way. Therefore, preparing the operating activities section of the cash flow statement either way yields the same results. Furthermore, the indirect method is required by industry regulations, so companies always report cash flows using the indirect method. However, if they so choose, they can also report cash flows using the direct method.

The direct method shows cash inflows and cash outflows for each of the operating activities. The indirect method, on the other hand, makes a series of adjustments to the company’s net income in order to account for the affects of noncash transactions recorded using accrual accounting. Both methods give the same result.

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Cash Flow Statement, Cash Flow Statement Definition

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cash flow statement, Cash Flow Statement Definition

Cash Flow Statement Template

A cashflow statement template can be found here:S.C.O.R.E. template gallery

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