Cashflow can mean a number of different things, but in accounting parlance it is the term used to describe the movement of cash into and out of a business. The rate of cashflow is seen as an important metric when looking at business health, as a business could, in theory, have a healthy bank balance but have no money coming in, and therefore a negative cashflow, which eventually will lead to financial problems.
A good one line definition of cash flow would be: the short term ability of the company to pay its bills when they are due and the ability to fund its present and future operations
When completing company accounts, an accountant will complete a cash flow statement alongside balance sheets, income statements, and any other documents that are required to be filed with a relevant authority such as Companies House, or that may be needed to calculate tax liabilities with HMRC, for example.
The cashflow statement itself is a relatively simple document that summarises the cash in and cash out of a business over a specific time period, which will usually be the accounting year and/or the tax year, depending on if these are different and if a business requires separate statements for both.
It shows where business income came from and where expenditure went, giving a total net balance in terms of incomings and outgoings but also making it simple to remove tax deductibles and calculate figures correctly.
The cashflow statement isn’t actually a part of the accounting process itself, but is something created from the balance sheet and income statement in conjunction with one another. In order to complete an accurate cashflow statement it is necessary to have the balance sheet to hand for the previous accounting/tax period so you can ascertain whether cashflow for the current period has been positive or negative, both within the period as well as in terms of the bigger picture for the business.
A cashflow statement will look at three areas, all of which a business owner should analyse carefully:
There are a number of key ‘takeaways’ that a business owner can get from a cashflow statement, which are the overall health of the business in terms of finances, and specifically whether the business is running out of money, if the business has spent more than it has earned over a certain period, and whether there are profits currently not in the bank, such as unpaid invoices.