Company's cash flow statement

Cash flow statement (in Finnish, rahavirtalaskelma, kassavirta)

A lot of companies' owners and top management consider this reporting format as the most important, and as a result, cashflow is the most often used from of reports. First of all, because, it is very difficult to fudge figures on the cashflow report and to fit them with different purposes, and secondly, such important operations as payment of obligations, dividends, investments are made based on the actual availability of cash.

Cashflow statement is one of the main forms of financial reporting, which shows the movement of funds within a company and summarizes information about the cash inflow and outflow of a company. It complements the balance sheet and income statement. Cash flow analysis provides the basis for assessing the ability of an enterprise to attract and use cash and cash equivalents. It indicates how well a company manages its cash, other words how well the company can generate cash to pay its debt obligations and to cover its operating expenses.

Cashflow consists of three main sections:

1. Operating activities: cash from business activities, other words from revenue-generating activities of the company.
2. Investment activity - the cost of resources intended to generate future income.
3. Financial activities - cash flows relevant to the formation of the capital of the company.

Cash flow can be calculated in two ways:

• by the direct method (kassavirtalaskelma) and
• by the indirect method (rahavirtalaskelma).

The direct method involves the main types of cash receipts and payments for a given period and is reflected as a difference between inflow and outflow of cash. We can say, in fact, this is a profit and loss statement compiled on the basis of the cash method.

advantages of the direct method:

• a simple and logical report form showing the company's ability to generate cash flow, pay its debts and make investments
• suited the best for making effective management decisions
• simple to calculate future cash flows

disadvantages of the direct method:

• reduction of the results of operating activities solely to monetary operations, ignoring accruals, which can lead to a false assessment of the company's performance
• to solve this problem, you need to make an additional comparison of cash flow from operating activities with net profit

With the indirect method, the net profit or loss is adjusted taking into account the results of non-cash transactions, as well as it is adjusted to changes in current assets and liabilities of the company.

the advantage of the indirect method:

• the ability to explain the difference between net profit, net cash flow and operating activities
• preferable for analysis of understanding the company's operational processes

the disadvantages of the indirect method:

• contains unnec­essary detail and may lead to some confusion
• it is possible to prepare on the basis of already closed/completed reports, as a result the terms of cashflow analysis fulfilment are increased

Negative cashflow shows the excess of the payments of the enterprise over its earnings, and means that there are no enough funds to cover current company's needs. Negative cash flow is not always the evidence of a loss. As a rule, this situation may be temporary and one of the reasons is the need to make payments for a large batch of goods. If cashflow is negative for a long period of time, then company’s management should urgently pay attention to this situation, because this is a signal of а problem in the company, and such a case requires a detailed analysis of the causes, probable consequences and development of measures to overcome the problem.

Cash flow statement, direct and indirect method, free download template in Excel format

English, Russian and Finnish versions

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