What is a cash flow statement and why should businesses create it?

What is a cash flow statement?

A cash flow statement is a report that shows the inflows and outflows of cash within a business over a specific accounting period. In simple terms, it gives a clear picture of a company’s income and expenditure.

It is one of the five main components of financial reporting, along with the income statement, balance sheet, statement of changes in equity and notes to the financial statements. Just like these other reports, the cash flow statement is crucial for assessing the financial health of a business. It allows you to assess the overall financial position of your company.

But that’s not all: it also helps you determine whether your company is managing its cash flow effectively. This document is an important business decision-making tool for both management and investors.

However, it is important to prepare the cash flow statement correctly. In Indonesia, the structure of this report is governed by the Financial Accounting Standards (PSAK) No. 2 issued by the Indonesian Institute of Accountants (IAI).

Advantages of a cash flow statement

The cash flow statement offers several significant advantages:

Assessment of the financial health of the company

The main benefit of a cash flow statement is that it provides insight into a company’s financial health. This is valuable for both the company’s management team and potential investors.

For management, the statement shows whether or not the company’s finances are in good shape, making it easier to identify problems and take the necessary action.

For potential investors, this report is an important tool for evaluating the company’s investment potential. It shows the company’s ability to generate revenue and helps investors to make informed decisions.

Enables more effective financial management

The cash flow statement not only shows the financial status, but also helps businesses to manage their finances efficiently. It enables management to ensure that they have sufficient funds for operations.

It can also be used to determine whether income and expenditure accounts are developing as expected. For example, if there are delays in one source of revenue, the company can focus on promoting other, more promising sources.

Support in decision-making

One of the most important functions of cash flow accounting is to assist in making business decisions. These decisions may involve increasing production, developing new products or securing financing.

For example, if the company’s year-end cash flow report shows a significant increase in revenue, management may decide to allocate more budget to production.

If, on the other hand, the report indicates a decrease in cash inflow, management may take measures to stabilize finances, such as seeking new investors.

Components of a cash flow statement

According to PSAK 2, a cash flow statement is divided into three main components:

Operating activities

The first component comprises the cash flow from the company’s core activities, including income and expenses.

Here are some common operating activities:

• Sales of the company’s main goods or services (cash inflow).
• Operating costs such as building rents and employee salaries (cash outflow).
• Net profit before tax, dividends and interest (cash inflow).

Investing activities

The second component focuses on investing activities. This includes activities that the company undertakes as an investment in its own business —i.e. not external investments, but the company’s internal investments.

Common investing activities include:

• Proceeds from the sale of fixed assets such as real estate and office equipment (cash inflow).
• Purchases of non-current assets such as buildings and computers (cash outflow).
• Dividends and interest income from the company’s investments (cash inflow).
• Losses from investments (cash outflow).

Financial activities

The third component is financing activities, which comprise all forms of financing received by the company, usually from external sources.

Typical financing activities are

• Loans and investments received from banks or investors (cash inflow).
• Loan repayments to banks (cash outflow).
• Dividend payments and capital returns (cash outflow).

Types of cash flow statements

There are two main types when preparing a cash flow statement. Here is a breakdown:

Cash flow statement using the direct method

The direct method provides a detailed overview of the actual cash flows from the company’s operating activities. It uses data directly from the company’s general ledger or bank statements. This method provides a detailed presentation of both cash inflows and cash outflows.

With this type of report, you can view the cash inflows and outflows for operating activities as well as the cash flow details for investing and financing activities.

Due to its comprehensiveness, this method requires extensive information and a complex preparation process. However, the accuracy of the direct method makes it reliable and easy to understand.

Indirect method Cash flow statement

The indirect method, on the other hand, is based on information from the accrual accounting found in other financial reports, such as the income statement and balance sheet. It compares these reports to track cash inflows and outflows.

This method is easier to prepare compared to the direct method, but provides less detailed information. In addition, this format can be more difficult to understand for those with limited accounting knowledge.

Challenges in the preparation of a cash flow statement

Preparing financial reports, including a cash flow statement, can be a challenge for businesses. Here are some common obstacles:

Data availability and accuracy

A major challenge is ensuring the availability and accuracy of data. You need to collect data from various sources and compile it into a comprehensive report.

For cash flow statements, accurately recording daily cash inflows and outflows, especially for operational activities involving multiple employees, can be a challenge. Automated data collection in an integrated system can be an effective solution for accurate and efficient reporting.

Accurate presentation of information

Another challenge is the clear and understandable presentation of information. It is important to create a report that is concise, clear and easy to interpret — especially if it is intended for people with limited accounting knowledge.

Access to technology and resources

The availability of technology and skilled resources is another common challenge. You need qualified staff with good accounting skills and sufficient time to produce accurate reports.

Technology plays a crucial role in creating an effective cash flow statement. Access to appropriate technology makes it much easier to produce quality reports and overall financial management.

Simplify reporting with Aspire Integration

As your business grows, the need for efficient financial management and accurate reporting increases. Relying solely on manual recording methods can be inadequate, especially with limited time and resources.

To streamline financial management and create accurate reports, you can rely on Aspire. Aspire’s all-in-one solution helps you to easily manage your company's cash inflows and outflows through a single platform.

For example, with Aspire’s payment gateway, you can manage and automate your customers’ payments from more than 26 payment methods. Meanwhile, with Aspire’s expense management, you can set budgets and monitor expenditures in real-time, ensuring that all of your spending is in line with the budgets.

Aspire also integrates seamlessly with your accounting software, simplifying the creation of cash flow statements and other financial reports. Want to find out more about how Aspire can help you grow your business? Contact our team today!