Many small and medium entrepreneurs don’t avail of MIS reports for their business.
Among the available MIS reports, Cash Flow is an important tool that can benefit business entrepreneurs.
Many entrepreneurs are unaware about what exactly Cash Flow is and how to prepare the Cash Flow Report.
Every entrepreneur asks this question “Am I making profits which are reflected in the Profit and Loss Account but the amount is not seen in the Bank Account as Bank Balance?”
Cash Flow Analysis is such a tool, wherein, you can know the Source of funds and Application of funds. In other words, from where you have got the funds in business and where have you applied the funds from the business.
Many Small and Medium Entrepreneurs have an accounts team. However, the team lacks the proper knowledge and competency to provide such MIS reports.
There are various aspects which are covered in Cash Flow Analysis:
- Cash flow from Operating Activities
- Cash flow from Investment Activities
- Cash flow from Finance Activities
Cash Flow from Operating Activities:
This provides the information of sources and application of funds from Operating Activities.
Cash flow from operating activities gives us an idea about Cash Profit or Loss excluding interest expense (as this will be included in cash flow from finance activities). Cash profit/loss is derived from profitability statement after adding back the depreciation. Also, this activity will include the cash flow from working capital items such as debtors, creditors, current assets, current liabilities, duties & taxes, and loans and advances. So, if it is positive, then there is inflow and if it is negative, then there is an outflow from this activity.
Cash Flow from Investment Activities:
This provides the information of sources and application of funds from Investment Activities.
Cash flow from investment activities gives us an idea about additional investments done or selling of some investments during a particular period. Also, this activity will include fixed assets purchased or sold during the period under consideration.
Cash Flow from Finance Activities:
This provides the information of sources and application of funds from Finance Activities.
Cash flow from finance activities gives us an idea about how much additional finance we have taken during the period under consideration or repaid the same through various sources like banks, financial institutions and relatives & friends.
Result of the Analysis
Adding or subtracting all the three figures from all the 3 activities will be your Net Cash Flow during the period under consideration. So, in this way you can read and understand the Cash Flow Analysis. Thus, this report helps us in taking small and big decisions relating to our business in order to make payments for short term period or long term period.
Article by – CA Vishnu Thard