The cash flow statement is one of three important financial statements, reflecting the actual cash inflows and outflows of a business during a period. Unlike the income statement or balance sheet, the cash flow statement helps business owners and accountants understand how the business is generating or consuming cash from operating, investing, and financing activities.
The following article by Bizzi will help you fully grasp the concept, structure, and how to read and analyze cash flow statements to optimize cash flow and improve financial management capacity.
1. Overview of Cash Flow Statement
Cash flow statement is an important tool that helps businesses track and analyze all cash inflows and outflows during the period, thereby accurately assessing financial performance and liquidity. This is an indispensable foundation for planning, controlling and making strategic decisions.
A. What is a cash flow statement?
Cash flow statement (BCLCTT) is one of three financial report The balance sheet and income statement are important financial statements of a business, in addition to the balance sheet and income statement. This report records and summarizes all actual cash inflows and outflows over a given period of time (usually monthly, quarterly or yearly), to reflect the business's ability to generate and use cash. The income statement is divided into three groups of activities:
- Business activities: Includes cash flow from core activities such as sales, customer collections, operating expenses.
- Investment activities: Record cash flows arising from the purchase and sale of long-term assets and financial investments.
- Financial activities: Relating to loans, debt repayments, stock issuance or dividends.
Through this report, businesses can monitor cash flow fluctuations and cash balances at the beginning and end of the period, thereby accurately assessing the liquidity situation.
1.2. Importance and role of BCLCTT
Cash flow statements not only reflect financial status but also support managers and investors to make effective decisions. Specifically:
- Ensuring financial transparency: Help shareholders and investors understand the cash situation and liquidity of the business.
- Analysis of money efficiency: Shows whether the business is using cash effectively, thereby adjusting spending strategies.
- Clarifying the difference between profit and cash flow: Many businesses are highly profitable but cash-strapped, and the P&L helps explain the reasons and manage risks.
- Financial planning and fundraising support: Based on cash flow data, businesses can determine capital needs, plan investments and orient future cash flows.
- Financial risk control: Identify persistent negative cash flow problems early to avoid insolvency.
2. How many parts does the Cash Flow Statement consist of?
The cash flow statement is divided into three main parts, fully reflecting the cash flows in and out of the business according to three core activities: business, investment and finance. The clear separation helps businesses track the efficiency of cash use, assess financial health and plan future cash flows.
Cash flow from operating activities
Reflects the cash flows related to the main revenue generating activities of the business. This is the most important part that shows the ability of the business to generate money from its core activities. Cash inflows usually come from sales, service provision, and other income such as interest on deposits or sale of trading securities.
Cash outflows include expenditures on raw materials, wages, taxes, interest, administrative and operating expenses, and compensation expenses. This section also includes adjustments for non-cash expenses such as depreciation and provisions for risks.
Cash flow from investing activities
Record cash flows arising from the purchase and sale of long-term assets and long-term financial investments. Cash inflows usually come from the liquidation or sale of fixed assets, or capital recovery from loans and investments. Cash outflows are mainly investment costs in machinery, equipment, technology, or capital contributions and long-term loans to expand operations.
Cash flow from financing activities (Financing Activities)
Related to cash flows that affect the capital structure and sources of financing of the business. Cash inflows can come from raising capital through issuing shares, borrowing from banks, or contributing capital from owners. Cash outflows include paying dividends, repaying loans, paying financial leases, or buying back shares. This section shows whether the business is expanding or contracting its financial scale.
3. 2 Popular Methods of Preparing Cash Flow Statements
Currently, cash flow statement can be prepared using two common methods: the direct method and the indirect method. Each method has its own advantages and disadvantages and is chosen depending on the cash flow analysis needs of the business.
3.1. Direct method
This is a method of identifying and presenting the actual cash flows in and out of business operations, by analyzing the details of income and expenditure from the accounting books.
- Characteristic: Directly summarizes cash and cash equivalents from operating activities such as sales, recruitment costs, interest expense, tax,…
- Advantage: Easy to understand and transparent, helping managers closely monitor the actual cash generation ability of the business.
- Disadvantages: Requires detailed and accurate data from accounting books, time consuming in manual compilation.
- Some common indicators:
- Revenue from sales and services
- Paying suppliers and workers
- Interest paid
- Corporate income tax paid
- Other income and expenses related to business operations
3.2. Indirect method
This method starts from accounting profit and adjusts items that do not affect actual cash flows to reflect net cash flow from operating activities.
- Characteristic: Based on pre-tax profit from the income statement, then adjusting items such as depreciation, provision differences and changes in working capital.
- Advantage: Easy to set up, less dependent on detailed data from accounting books, suitable for businesses that do not have their own cash flow recording system.
- Disadvantages: Little clear reflection of actual income and expenditure, difficult to track each specific cash flow.
- Implementation sequence:
- Starting from pre-tax profit
- Add up non-cash items like depreciation of fixed assets
- Adjusts for changes in current assets and liabilities such as inventories, receivables/payables
Both methods are accepted in financial reporting according to Circular 200/2014/TT-BTC. However, to make cash flow transparent and serve management purposes, many businesses are now prioritizing the combination of both approaches when analyzing.
4. Instructions for Effective Cash Flow Statement Analysis
Analysis cash flow statement (BCLCTT) is an important step to help businesses assess their financial health, determine their ability to generate cash flow and make more accurate management decisions. Below are the steps for effective analysis, according to each important aspect:
4.1. Assessing profit quality through operating cash flow
Accounting profit does not reflect overall financial health, as it can be affected by non-cash expenses such as depreciation. Depreciation policies and accounting adjustments should be carefully reviewed. A business with high profits but low net cash flow from operations (due to capital occupation, high customer debt) is a sign to watch out for.
If this cash flow is negative for many consecutive years, it may warn of the risk of insolvency or unsustainable operations.
4.2. Analysis of investment information and dividend policy
Investment cash flow is usually negative, indicating that the business is spending money to expand, upgrade machinery, or purchase long-term assets. However, if the negative cash flow is large but the corresponding revenue/profit efficiency is not seen, the investment strategy needs to be re-evaluated.
Dividend policy and financing cash flow help clarify how a company uses its earnings. A company with a steady cash flow from dividends is attractive to investors. However, if financing cash flow comes mainly from debt, a careful analysis of the purpose of capital use and the ability to repay debt is needed.
4.2. Important indicators to analyze
Tracking cash flow indicators helps businesses assess their ability to generate real cash, their investment and financial efficiency, and their potential for sustainable growth.
- Net cash flow from operating activities: Needs to be positive and have a steady upward trend to ensure stable operation.
- Net cash flows from investing activities: Positive indicates effective return on investment, negative may be due to expansion expenditure or capital loss.
- Net cash flow from financing activities: Positive is usually due to increased borrowing or issuance of shares; negative can be due to debt repayment or dividend payment.
- Net cash flow during the period: The above three cash flows are summarized to help assess the overall cash flow level.
- Cash and cash equivalents at the end of the period: The higher this index, the more it shows that the business has the ability to flexibly rotate capital.
4.4. Combining data analysis and comparison
BCLCTT should not be analyzed in isolation. compared to previous periods help assess trends, and compare with competitors in the same industry helps determine competitive positioning. Additionally, combining the data with other financial statements such as the income statement, balance sheet, and notes helps make more informed decisions. Note that the cash flow statement reflects past performance, so it is important to consider additional variables and forecasts to plan accordingly.
5. Application of Technology in Cash Flow Management and Cash Flow Reporting
Technology and software play a key role in automating and improving the efficiency of cash flow management, as well as supporting the preparation of financial statements, including the P&L.
5.1. Automate and Efficient Cash Flow Management
Modern accounting software can automatically compile data into tax reports, financial reports and books, helping businesses submit reports promptly and accurately. Support tools help create more accurate cash flow reports.
5.2. Bizzi – Solution to support cash flow management and cash flow reporting
Bizzi is a specialized financial automation platform that provides features that effectively support cash flow management and indirectly improve the accuracy of BCLCTT:
- Automate input invoice processing (IPA + 3way): Bizzi uses RPA and AI technology to automatically upload, check and reconcile incoming invoices, extracting data quickly. The platform automatically compares invoices with purchase orders (POs) and warehouse receipts (GRs) in real time to detect discrepancies. This significantly reduces manual data entry, minimizes errors and saves time for the accounting department, thereby positively affecting cash flow and financial data accuracy.
- Business Expense Management (Bizzi Expense): Digitize the entire process of requesting payments and approving expenses. Allows for setting budgets by department/project and monitoring actual spending against budget in real time, with alerts when budget is exceeded. This improves visibility and control over spending, allowing for more efficient cash flow management.
- Accounts Receivable Management (ARM): Provides tools to track and control debt, including key metrics like Days Sales Outstanding (DSO) and debt aging reports. The system can generate automated and customized debt reminders, helping to speed up the collection process and improve your business's cash flow.
- Electronic invoice (B-invoice): Support the creation, management and storage of electronic invoices according to regulations, integrate API with ERP & Accounting systems to synchronize data. This contributes to the transparency and accuracy of financial data, creating a solid foundation for preparing cash flow reports.
- Bizzi Financing: Bizzi also facilitates businesses to access capital through supply chain finance and working capital financing options with fast processing and competitive interest rates. This feature helps to address capital needs to expand business or cover cash flow shortfalls.
- Integration with other systems (ERP & Accountant): Bizzi places a strong focus on seamless integration with leading ERP systems (such as Oracle NetSuite, SAP, Microsoft Dynamics 365 Finance, Odoo) and other accounting software. This allows financial data to be synchronized from multiple sources into one platform, providing comprehensive and accurate information for preparing and analyzing financial statements, while optimizing existing financial processes.
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6. Conclusion
Understanding and analyzing cash flow statements is the foundation for businesses to control cash flow, evaluate operational efficiency and build long-term financial strategies. To support this process, Bizzi provides an automated solution to help synthesize, compare and track cash flow transparently and accurately according to current accounting standards. You can Download cash flow statement template according to Circular 200 here: Download report template and start optimizing your business financial management today.
