The Cash flow statement is a compulsory document to file with the Accounting and Corporate Regulatory Authority (ACRA). However, it serves a purpose way beyond regulatory requirements.
As we serve startups across Southeast Asia, we observe cash flow problems to be a recurring issue for young and budding companies. In fact, liquidity and cash flow issues have been highlighted as one of the main reasons why startups fail.
In compliance with Singapore Financial Reporting Standards (see “archived documents”), the mandatory items of a cash flow statement are as follows.
Operating activities take into consideration cash obtained or used from your startup’s operational transactions. This portion of the cash flow statement allows you to identify sustainable cash inflows, management of working capital, and early detection of liquidity issues.
Investing activities indicate cash flow from acquisition and disposal of assets and investments. This section highlights lucrative investments and flags less profitable ones that produce non-recurring returns.
Financing activities take into consideration cash movement from changes in liabilities and shareholder’s equity. This portion highlights cash flow from financing activities such as term loans and the purchase of shares.
Also known as net working capital, this is the difference between your startup’s cash inflows and outflows. A positive cash flow indicates that a company’s current assets are sufficient to fund its current liabilities.
Conversely, a negative cash flow indicates that your current liabilities are higher than your current assets. In the short-term, a negative cash flow is fine as it could mean that you just bought a large amount of assets.
However, if your startup business is facing a negative cash flow for extended periods, this could potentially be a problem.
Constructing the Statement of Cash Flows from scratch can be an uphill and intimidating task for startups that are new to this. Fret not, for we have got you covered with this sample of a cash flow statement by ACRA.
Use this sample statement by adding or removing the items that are relevant to your business.
As illustrated in the sample cash flow statement, the sources of working capital can be condensed into 4 “C”s
With these in mind, your startup can look to generate healthy cash flow through the following methods.
Collecting payment from customers before financial obligations are due ensures that your startup has sufficient funds to pay your suppliers.
This can be done by shortening the payment term for customers or giving them discounts for making early payment.
In addition, negotiating for a longer credit term with your suppliers also gives your startup more time to gather cash inflows from customers.
In monitoring your startup’s inventory levels, sieve out slower-moving products. You should buy or produce less products that accumulate huge amounts of stock.
This frees up cash that was once tied to inventory, enabling your startup to channel these funds towards timely payments. This cash can be spent on meaningful marketing strategies that increase sales for potential business expansion.
A high net working capital does not equate to a healthy cash flow. A large cash flow can mean that your startup is not fully utilising its available cash to maximise growth.
Instead of leaving cash on the table, seek out money-making investments or new growth opportunities such as expanding your business product line or entering a new market.
The cash flow statement continues to be a highly important financial statement for your business - for legal requirements and measuring your business' health.
A healthy cash flow is key for a startup to thrive and can be managed through analysing various aspects of the cash flow statement.
Moreover, with COVID-19 and the recession in place, this statement plays an even essential role in ensuring your business' sustainability to make it past these difficult times. Therefore, you must ensure that your cash flows are managed efficiently and adequately.