To prepare a cash flow statement, it is essential to have information on the company’s income and disbursements. This information can be found in the company’s accounting records and it is important to order them in such a way to be able to determine the balance for the period (generally one month), and to estimate future cash flows.
If the balance is positive, it means that income for the period was higher than disbursements (or expenses); if it is negative, it means that disbursements were higher than income. According to the Inter-American Investment Corporation (IIC), the importance of preparing a projected cash flow statement is that it allows us to, for example:
- Anticipate future deficits (or lack of) cash, and hence make a financing decision beforehand.
- Establish a solid base for requesting credit; for example, introduce it in our business plan or project or management strategy.
- If we have accumulated positive balances in any period, part of this balance can be invested in the capital market to generate an additional source of income. This income is recorded as interest income in one of the income lines. It can also be invested in technologies or equipment to improve the company’s management.
The cash flow statement is characterized by identifying and documenting what effectively enters and exits the business, such as sales income or the payment of accounts (disbursements). The cash flow does not use terms such as “profit” or “loss” since it is not related to the income statement.
Income examples: income from sales, debt collection, leases, collection of loans, interest, etc.
Expenses or cash disbursements: invoice payments, tax payments, salary payments, loans, interest, debt write-offs, water or electricity services, etc.
The importance of the cash flow statement is that it allows us to rapidly know the company’s liquidity, delivering key information that helps make the following decisions:
- How much input can we buy?
- Can we purchase in cash or is it necessary to request credit?
- Should we collect in cash or can we grant credit?
- Can we pay off debts when due or must we ask for refinancing?
- Can we invest the surplus of money in new financial instruments or projects?