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Managing Your Cash Flow
Overview
A statement of Cash Flow examines the movement of cash, including currency, checks, and deposits, throughout your business over one year. Cash equivalents are short-term, temporary investments such as treasury bills, certificates of deposit, or commercial paper that can be quickly and easily converted to cash.
 
In order to provide products and services to your customers, your business will make investments, pay bills, and pay off loans and the company will turn cash into even more cash as a result of margins. The Cash Flow Statement shows the uses of cash, the starting and ending amounts of cash and cash equivalents for each year, and the total change in cash and cash equivalents after profits over the one year period..
 
It is necessary that as a business owner you are able to create a Statement of Cash Flow, and the following information explains exactly how to do that.
 
Major Classifications of Cash Flow
  • Cash Flow Statements are broken down into three sections:
  • Operating activities
  • Investing activities
  • Financing activities
 
Operating Activities:
Operating activities (all transactions and events that enter into operating income) include cash receipts from selling goods or providing services, as well as income from items such as interest and dividends. Operating activities also include your cash payments such as inventory, payroll, taxes, interest, utilities, and rent. The net amount of cash provided (or used) by operating activities is the key figure on a statement of cash flows.
 
Cash receipts include:
  • Sale of goods or services
  • Interest revenue
  • Dividend revenue
 
Cash payments include:
  • Inventory purchases
  • Payroll
  • Taxes Interest expense
  • Other (utilities, rent)
 
While cash inflows from interest or dividends could be considered investing or financing activities, the FASB classifies them as operating activities (which means you should too!).
 
Investing Activities
Investing activities include transactions and events involving the purchase and sale of securities (excluding cash equivalents), land, buildings, equipment, and other assets not generally held for resale. It also covers the making and collecting of loans. Investing activities are not classified as operating activities because they have an indirect relationship to the central, ongoing operation of your business (usually the sale of goods or services).
 
Cash receipts include:
  • Sale of plant assets
  • Sale of a business segment
  • Sale of investments in equity securities of other entities or debt securities (other than cash equivalents)
  • Collection of principal on loans made to other entities
 
Cash payments include:
  • Purchase of plant assets
  • Purchase of equity securities of other entities or debt securities (other than cash equivalents)
  • Loans to other entities
 
Financing Activities:
All financing activities deal with the flow of cash to or from the business owners (equity financing) and creditors (debt financing). For example, cash proceeds from issuing capital stock or bonds would be classified under financing activities. Likewise, payments to repurchase stock (treasury stock) or to retire bonds and the payment of dividends are financing activities as well.
 
Cash receipts include:
  • Issuance of own stock
  • Borrowing (bonds, notes, mortgages, etc.)
 
Cash payments include:
  • Dividends to stockholders
  • Repaying principal amounts borrowed
  • Repurchasing business' own stock (treasury stock)
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