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What is a Cash Flow Chart? Benefits and How to Do It

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Cash Flow Chart

A cash flow chart is one of the major elements that every business needs in order to run smoothly. Similar to a balance sheet or a profit and loss statement, running a business requires you to monitor your cash flow keenly. To evaluate the health of your business, you need to involve the power of a cash flow chart to give you a clear picture of the direction your business is making.

However, there is a lot more that you need to know about the cash flow chart. Remember that the chart covers a significant part of your business operations, making it one of the most vital tools every business owner needs. This blog elaborates more about this charting tool and a lot more!

What is a Cash Flow Chart?

A cash flow chart, also known as a cash flow statement, is an advanced budget summary and data revolving around cash changes that are equivalent to the business. The chart acts as the bridge that connects the balance sheet and the income statement. It displays the rate at which money moves in and out of business.

In addition, the cash flow statement is considered the most intuitive among all the budget summaries. It mostly follows the total amount of money that is made by the business in three primary ways. These primary ways include financing, investment, and operations. The sum of these three components combined is referred to as the net cash flow.

What does a cash flow statement look like? Let’s find out more.

The Format of a Cash Flow Statement

A cash flow statement is specifically designed to offer insights into the changes that occur within the cash you are holding in hand. It mainly covers three significant aspects of your business. These areas include:

Investment Activities

The cash flow revolving around investing activities includes things to do with acquisition and the disposal of the non-current assets within the business, among other investments that are not included in the cash equivalents. In addition, the investing activity includes the cash flows closely associated with buying and selling property.

It also includes investing in fixed deposits, the stock market, equipment, and other mutual funds associated with the process. This segment includes all sorts of things that are associated with business investment.

Financing Activities

This is one of the major components that facilitates the smooth running of business operations. The cash flow associated with the business’s financing activities results in changes in the size and composition of the equity borrowing or capital. This is also closely associated with matters to do with the borrowing and repayment of bank loans.

Also, it deals with the issuing and buying of back shares that contributes to the growth of the business. Note that the payment of dividends is also classified under the Sankey chart.

Operating Activities

These are regular business activities. Operating activities include the revenues collected from selling products and services, interests, and the dividends the business receives. In addition, this segment also includes overheads, payments made to suppliers and vendors, taxes and many others.

How to Use the Cash Flow Chart?

When you want to prepare your cash flow chart, you need to have your income statement and balance sheet at your disposal. Once you have all these components at hand, you can now get started with the process. Below are the steps to consider when using a cash flow chart.

Calculate Your Net Income

When calculating the net income, you need to refer to the income statement, which has more details than you need. Note that all your business operating activities are reflected in the income statement. In simple terms, your net income is basically a product of all your profits and the overall revenue that you generate within the business minus the losses and the total expenses that you incur.

Note that this calculation is made by targeting a particular time frame in mind. What you need to keep in mind is the fact that your net income is not similar to your entire cash flow.

Convert the Net Income to Net Cash from your Operating Activities

Keep in mind that your cash flow chart is made based on the accrual method of accounting, giving room for any adjustments that need to be made. The adjustments are mainly made to pacify the net income using the net cash. Using the accrual method gives you the policy to recognize revenue. In most cases, this is connected to either doing the work or offering a particular service.

At this point, you need to record all your expenses whenever a commitment is made, such as when you agree to sign a contract or pay a certain fee. Considering the above explanation, your income statement will reflect your losses or gains that may not reflect the exact cash you have in hand.

Calculate the Net Cash Generated by the Net Cash Financing and Investing Activities

When you are fine calculating the net cash flow from your business operating activities, you will find things getting easier. In addition, you will need to calculate your entire net cash flow from the investing and financing activities. Note that all these activities require you to add your inflows and subtract the outflows. At this point, you don’t need to make any kind of adjustments.

Benefits of  Cash Flow Charts

It helps verify the liquidity and profitability positions of all the cash flow statements. It enhances the management panel to ascertain the liquidity and profitability position of the business. Liquidity is the ability to pay the obligation once it becomes due. Given that the cash flow statement also represents the cash position, it helps verify the liquidity position, which is also applicable to profitability.

The cash flow chart is good at verifying the capital cash balance of the business. Companies can use this mechanism to evaluate the idle, excess, or shortage of cash position. After doing the verification, the business management can incest the excess cash into other projects that will contribute to the success of the company.

If you are having struggles when it comes to managing your cash, the cash flow chart can do exactly that. When the cash flow chart is properly prepared, it becomes pretty easy to manage your cash. The business management can use the statement to estimate their respective inflows.

Conclusion

The cash flow chart has a significant role to play in business operations. Any business that wants to make good use of its revenues and transform its brands requires to make proper use of the cash flow statement. Provided that you understand how to present your data on the chart, you are likely to enjoy multiple benefits that are presented by the cash flow statement.

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