Control Company Costs

What is a Cash Flow Statement? Definition and Importance

SAP Concur, Petr Seidner |

The primary purpose of a cash flow statement is to provide a snapshot of your ability to generate cash and meet your obligations. In this article, we will explain what is a cash flow statement, cash flow meaning, show you an example of a cash flow statement format, and provide some tips for improving your cash flow.

So, what does cash flow mean in business? Let’s start by defining it.

What Is a Cash Flow Statement?

Cash flow is the net balance of cash that comes into and goes out of the business at a specific point in time. Cash flows out when you buy inventory. Cash flows in when customers buy your products. While it sounds simple, it can get quite complex when you think about all the different expense line items you have, such as rent, utilities, payroll, bank and credit card fees, etc.

Many businesses also don’t see immediate payments for every purchase either. Credit terms and financing can push payments down the road from the purchase date.

The Importance of a Cash Flow Statement

Cash flow can be positive or negative. Positive cash flow means more money is coming in during your measurement period than going out. That’s a good thing. Negative cash flow means you have more money going out than is coming in. That can be an issue. According to SCORE, 82% of business failures are due to cash flow problems.

Besides simply keeping your business afloat, analyzing your cash flow helps you identify periods where you have cash shortfalls or surpluses. This knowledge can guide you in making decisions.

Looking at historical cash flow can help you forecast seasonal swings to set aside a rainy-day fund. Forecasts can help you make better decisions. For example, cash flow statements can tell you whether you have sufficient cash on hand to fund new investments or expansion or whether you need to finance purchases.

If you plan to sell your business in the future, cash flow is a key indicator of financial health and is used in setting valuation.

Another area where cash flow comes into play is in compliance. If you have a loan, you may need to prepare and submit cash flow statements as part of financial reporting or include such information in public filings for investors.

The Structure of a Cash Flow Statement

Cash flow statement example formats typically have three main sections:

  1. Cash flow from operations
  2. Cash flow from investing
  3. Cash flow from financing

1. Cash Flow from Operations

Operations typically represent much of your revenue and expenses, tracking:

  • Cash inflows: Sales revenue paid, interest income, and any other revenue created
  • Cash outflows: Employee salaries, payments to suppliers, taxes, and other operating expenses.

2. Cash Flow from Investing

Here, we capture the cash flow from buying or selling investments and assets. This might include:

  • Cash inflows: Proceeds from selling property, equipment, or investments
  • Cash outflows: Purchases of fixed assets or investments

3. Cash Flow from Financing

Financing activities also need to be accounted for, including debt and equity. For example:

  • Cash inflows: Proceeds from issuing stock or borrowing from lenders.
  • Cash outflows: Loan repayments, dividend payments, or stock buy-backs

Types of Cash Flow Statements

Cash flow statements can be produced using two different methods direct and indirect. The direct method provides a more transparent view of the actual cash flows while the indirect method uses accrual accounting information to produce the cash flow.

Direct Method in Cash Flow Statement

The direct method directly lists the cash receipts and cash payments related to operating activities during the reporting period. It lists all the cash coming in and going out.

Indirect Method in Cash Flow Statement

The indirect method starts with net income from your income statement and adjusts for non-cash items, such as adding back in expenses such as depreciation and amortization. With the indirect method, you also adjust for changes to your working capital, such as accounts receivable, accounts payable, and inventory.

Strategies for Improving Cash Flow

By monitoring your cash flow statement — and taking a few proactive steps — you can improve your cash flow. Some key strategies for improving cash flow include:

  • Conducting customer credit checks: Performing credit checks on customers can help identify potential payment delays and mitigate cash flow risks associated with late payments or non-payments.
  • Leasing instead of buying: Leasing supplies, equipment, and real estate can improve cash flow by allowing you to pay in small increments instead of making large upfront purchases.
  • Offering discounts for early payment: Providing customers with incentives for paying their bills ahead of time can help accelerate cash inflows.
  • Improving your inventory management: Regularly assess and optimize inventory levels by eliminating slow-moving or obsolete products, freeing up cash tied up in excess inventory.
  • Sending invoices immediately: Prompt invoicing and clear payment terms can facilitate faster receivables collection and improve cash flow.
  • Using electronic payments: Utilizing electronic payment methods and credit cards can provide additional time before payments are due, temporarily improving cash flow.
  • Negotiating with suppliers: Negotiating better terms with suppliers, such as discounts for early payments or extended payment periods, can positively impact cash flow.
  • Forming buying cooperatives: Joining forces with other companies to create a buying cooperative can leverage collective bargaining power and secure bulk discounts from suppliers, improving cash flow.
  • Increasing pricing: Carefully evaluating and strategically increasing pricing can lead to higher profit margins and improved cash flow.
  • Establishing lines of credit: Having credit available can help provide a hedge against periods of cash flow shortages.

Travel and Expense Management

When it comes to travel and expense management, automation can help streamline the reporting and reimbursement process to ensure prompt payment while also reducing unnecessary costs. Expense management is a crucial component of managing cash flow. It directly impacts the amount of cash you keep.

Use Corporate Cards

To manage your T&E more effectively, consider using corporate cards. This gives you better control over spending rather than relying on employees to use their personal cards or pay in cash. You can put limits on spending amounts and categories or restrict payments only to preferred suppliers. You can also run audits to prevent and detect fraud. Many cards offer rebates for spending as well.

Automate Expense Reviews

AI-powered automation can simplify and streamline your expense management. Rules-based algorithms can automatically check for compliance and fraud.

Employ Digital Spend Management

Best-in-class companies use digital expense and vendor invoice management technology to drive efficiency and help manage cash flow. Not only does this simplify your expense tracking and processing, but it reduces the amount of labor required, providing bottom-line savings. Top companies deploying digital spend management tools see an average of 17% faster cash-to-cash cycles.

Managing Cash Flow with SAP Concur Solutions

SAP Concur solutions provide the finance automation you need to simplify cash flow management. With near real-time visibility, reporting and tracking, and transparency, you can easily monitor and manage your cash flow more effectively to make better business decisions.

Near-real-time visibility into your data

Near-real-time visibility into your cash flow data provides the insight you need for expenses, accounts payable, and reimbursements.

Standard reports track progress and target productivity

Automatically generate reports each month to get insights for planning, budgeting, and forecasting.

Transparency and proactivity

Get greater transparency into your cash flow for proactive decision-making. SAP Concur solutions offer bespoke dashboards, so each department can access the relevant reports they need.

Reduce manual tasks

By automating finance processes, teams save a significant amount of time weekly. This can add up quickly — as much as 132 hours for travel and expense management and 122 hours for invoice management. This time savings reduces manual tasks by freeing up resources for higher-value activities. Learn more about how SAP Concur solutions can help you manage your cash flow more effectively.

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