Business & Finance

How to Calculate Ending Cash Balance on Cash Flow Statement

How to Calculate Ending Cash Balance on Cash Flow Statement

There are several problems associated with the preparation of reporting documents. One is the lack of understanding why specific reports are needed and how to compile them. Several tips will help you avoid unpleasant surprises and prepare an accurate analysis of the movement of finances. It is also important to have a separate money organizer to deal with unforeseen situations.

First, it is worth pointing out that funds flow statements have three components. When we talk about the remaining money on the balance sheet, it means the net profit calculation.

It requires information on the amount of capital received from financing, operating, or investing activities, as well as the sum of expenditures for the current reporting period. The duration is determined according to the applicable regulations.

What Is a Statement of Funds Flow?

Corporations and small companies evaluate their performance based on the calculation data. Financial documentation is prepared for this purpose. The amount of profit and expenses is only one part of the overall balance sheet. The calculations are also made to determine the business’s profitability.

The report on the funds flow of the company is a demonstration of the turnover of finances for a certain period. The calculations take into account the sources of profit, as well as the directions of expenditure. This way, it is possible to obtain data on how the company uses the available budget.

It is necessary to pay attention to operational, investment, and financial activities to prepare the documentation. You can present the finished report using direct and indirect methods. Corporations often use the latter option as more convenient.

Must Read: Cash Basis Accounting vs. Accrual Basis Accounting

What Is the Difference Between Direct and Indirect Calculation Methods

It should be noted in advance that the chosen calculation method will not affect the result, although the approaches are different. It is necessary to clarify how the proposed methods work to notice the difference. This way, it will be easier to recognize the distinctions.

The direct method of keeping track of the movement of finances is carried out as follows:

  • make a list of all financial transactions;
  • summarize the amount of capital that was received for the work;
  • sum up the expenditures that were made during the reporting period.

This way, all information about the company’s activities is entered into the report to determine the profit and budget spending. The real situation is displayed if taxes and other mandatory fees are included in the calculations.

Reporting by the indirect method means that the first sum is represented by net income. In other words, it is necessary to calculate the capital received and spent. The methodology also includes adjustments for equipment depreciation and amortization.

Both methods remain acceptable to IFRS. A discrepancy in the figures indicates that an error was made in the calculations. It is worth reassessing current efficiency. Since there is no difference between the data obtained by direct or indirect methods, you can choose any of them. In this respect, the decision is up to the head of the enterprise.

How to Draw up a Statement of Funds Flow

Since the indirect method of calculating companies’ capital is more common, we will focus on mandatory transactions. The direct method does not require some data (for example, the starting balance sheet), because this amount is not included in the list of initial information for the report.

So, it is necessary to complete the following steps to use the indirect method:

  1. Starting balance ( opening balance of the funds): You can find the required information in the profit and loss statement. It is essential to consider that the data corresponds to a specific period. So, the information is considered outdated if there is an audit between the calculations.
  2. Operating activities: This stage determines what profit the company received during the period. For this, an accounting of all financial transactions that brought capital growth is carried out.
  3. Investment activity: This section of the report is about the purchase or sale of long-term assets. This category includes real estate, premises, and equipment. It is not necessary to include information about debts in the report.
  4. Financing activities: Expenses related to debt payments or loan repayments are included in this section of the calculations. The category also includes capital inflows raised, dividends to other shareholders, and other financial transactions.
  5. Totals balance sheet: It is necessary to divide the amounts into two groups for calculations: profitable and unprofitable. This way, the summing up of one and other funds with the subsequent comparison will allow you to see the real financial situation.

If you get a negative number after calculations, you should reconsider your attitude to capital. A positive trend indicates that the company makes a profit.

Statement of Funds Flow: The Direct Method

The first thing to do is to prepare a list of all transactions using the company’s finances. The list includes payment for services by customers, attracting investments, selling shares or real estate, and much more. Only a detailed accounting of the operation will allow you to make the correct calculations.

The second part of the report includes the outflow of funds for the company’s maintenance: payment of debts, payroll, advertising costs, and other areas related to the “loss” of capital. Next, the sum of losses is calculated, which is used to summarize the balance sheet at the next stage.

The final calculations will determine the business and activity profitability based on accurate data. After that, you can decide to change the method of management, optimize work processes, and search for alternative ways to increase profits.

See Also: In 48 Hours or Less – Getting a Business Line of Credit

Conclusions That Can Be Drawn From the Report

Scaling up operations and increasing profitability are the main goals of the owners. It is necessary to provide reliable facts of profitability to stimulate investments. For this, it is essential to audit the finances and prepare a report using a convenient method.

So, the results for the reporting period will allow you to:

  1. Determine the “quality of profit”: You get figures when calculating operating performance, which are compared with net profit. The difference between them indicates the profitability of the work. If the cash flow for operating activities exceeds net income, the company manages its finances correctly.
  2. Present overall performance: Investors tend to trust the accounting records because they hide the efficiency of the operation. The availability of free funds in the company allows to cause an increase in demand. This way, companies get an inflow of capital, which they allocate to optimization.
  3. See the allocation of funds: It is necessary to evaluate operational, financial, and investment activities for the report. By preparing calculations, it is possible to determine how budget gaps are eliminated. If money for operations is used to cover debts, it is difficult to call the company profitable.

Do not evaluate financial reports as a requirement of the Ministry of Finance. Conducting an audit for the reporting period (both monthly and quarterly) helps establish operations and improve the profit quality. In addition, it is another way to make sure that the activity is profitable.

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