Updated: Jun 17, 2022
✦ John Clarke explains how cash flow is the lifeline of a business
What kind of heart does your business have? Is it a cash-generating machine or a cash eating monster? Cash flow to a business is like bloodflow to a person. A healthy cash flow provides money to pay the bills, to reinvest in the business and to share with the owners.
A lot of the time in business we look at the Profit & Loss Statement (sometimes called the Income Statement) and the Balance Sheet (sometimes called the Financial Position Statement). These can be misleading because a business could have a “healthy” profit, and more assets than liabilities (money it owes), if the business’ assets are tied up in money owing to it, it might not have enough money to pay the bills when they need to be paid.
There’s a missing link between the Profit & Loss Statement and the Balance Sheet which ties them together. This is the Statement of Cash Flows.
A typical statement of cash flows splits cash into three categories:
Cash flows from operating activities
Cash flows from investing activities, and
Cash flows from financing activities
and looks a bit like this:
XYZ PTY LIMITED
STATEMENT OF CASH FLOWS 2021
CASH FLOWS FROM OPERATING ACTIVITIES
Receipts in the course of operations 500,000
Payments to suppliers and employees -300,000
Net cash provided by operating activities 200,000
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property, plant & equipment 10,000
Purchase of property, plant & equipment -40,000
Net cash provided by financing activities -30,000
CASH FLOWS FROM FINANCING ACTIVITIES
Cash received from borrowings 0
Repayment of borrowings -80,000
Dividends Paid -50,000
Net cash provided by financing activities -130,000
Net increase in cash held 40,000
Cash and cash equivalents at beginning of financial year 20,000
Cash and cash equivalents at end of financial year 60,000
Looking at this I see a business that is generating cash from its usual activities, and which can reinvest and reduce its loans and pay dividends to its shareholders
Contact me at email@example.com if you would like further information on how your business can be a cash-generating machine.
As always the advice in this article is general in nature and you should contact an accountant or tax agent for advice that is specific to your circumstances.
Contact John Clarke:
a/ 6/114 William Street, Port Macquarie, NSW 2444, Australia
t/ 0481 039 851
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