The most preferred document to gauge the firm’s financial health is the financial statement and audited report. The statement comprises an audited report stating whether the statements, figures, and record keeping are qualified or unqualified.
The balance sheet portrays the financial position at that particular date. Its main components are current assets, current liabilities, non-current assets, fixed assets, non-current liabilities, long-term liabilities, and equity (which primarily comprises capital, retained earnings, and long-term reserves).
The second statement is the profit and loss statement, also called an income statement, which depicts the revenue and loss position for a specific period. This statement has various heads, such as sales, cost of goods sold, depreciation, financial expense, and other items. It gauges the operational efficacy, net profitability, and the earnings per share.
The third and perhaps the most important statement is the cash flow statement. This statement is divided into three major components: Cash Flow from Operating Activities, Cash Flow from Investing Activities, and Cash Flow from Financing Activities.
To manage the firm’s cash flow statement effectively, the finance managers adopt their own unique and preferred methodologies for better management. At first, the entire amount of net profit is picked up from the income statement, and non-cash items (such as depreciation and amortization) are plowed back into the opening figure of the cash flow statement.
Finance managers view the cash flow statement (for management’s ease) differently to simplify it. They categorize it mainly into two main domains: “Needs and Sources.” Sources are the managed funds the company generates through operations and working capital sources or acquiring funds from outside the firm. Needs are requirements that are funded through external sources.
To manage cash flow efficiently, the statement is further divided into two slots: short-term (also known as operating sources and operational needs) and long-term (non-operating sources and non-operating needs).
Figures extracted into operating sources are then filtered through operating needs to determine a net cash flow position from working capital activities. This figure shows how much cash the firm has generated from its primary operations. The figure also foretells the position of working capital requirements or not. If the figure is negative, it implies that the inflows are less than the firm’s outflows and the company requires additional funds to meet its working capital requirements. Upon seeing the picture of the figure, the business is in an able position to make an educated decision about securing any additional financing requirement or not. Naturally, the company will not decide to affect its liquidity and gearing ratio. It will also help the business analysis and determine that there is no mismatch in the balance sheet. If such an incident does occur, the business can go into balance sheet restructuring and improve its financial position in the eyes of the shareholders and investors.
Non-Operating Sources and Non-Operating Needs tell if the company is experiencing any stress on its cash flow due to capital expenditures or unnecessary dividend payouts.
Cash flow management, in essence, represents the proper financial health of the picture as opposed to an income statement (where depreciation and amortization are expensed out). Non-cash items are added to the cash flow statement to get a precise net cash flow amount. Furthermore, all liabilities and expenses that are provisioned but not paid out (such as the current portion of long-term debt or financial leases) are added back.
The primary business agenda is to make a profit and generate revenue. Even if the income statement reveals a healthy profit for the business, due to specific accounting methodologies and deferment entries), the cash flow management will depict the proper policies the company complies with.
About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud platform where their QuickBooks™️ file, critical financial documents, and back-office tools are hosted in an efficient SSO environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity.
