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The Two Types Of Cash Flow Report Or Forecast

If you’ve looked at any kind of accounts or forecasts for a business, you may have noticed that there is a cash flow statement that is in a different format to the one that you’re used to and you feel confused.

This can be a problem because cash and cash flow are vital concepts for every business owner to master.

>>> Why Cash And Cash Flow Are Important

That’s because there are two very different types of cash flow reporting, with distinct advantages and disadvantages.

The Two Types Of Cash Flow Report Or Forecast

The two types are:

  1. Receipts & Payments
  2. Cash Reconciliation from the Profit

I intend to write more detailed articles about both of these cash reports but below are summaries of their main features.

Both can report on historical cash flows and movements in the bank balance or can be used to forecast future cash flows.

The Receipts & Payments Cash Flow

This format is simple and intuitive.

We know that cash flow equals the bank balance at the end of the period minus the bank balance at the start of the period.

You can also think of cash flow as equal to total receipts minus total payments in the period.

The Receipts and Payments Cash Flow summarises these transactions into main headings.

For receipts that will mean Cash Sales, Credit Sales and Other Receipts (e.g. money lent to the business by the owner).

For payments this will mean Cash Purchases, Credit Purchases, Wages & salaries, Employment Taxes & Social Security and Other Payments.

The general rule is that if the receipt or payment is significant, it should be separated.

This type of cash flow report (past history or future forecast) often has a series of columns to show the transactions from shorter periods.

E.g. a month of quarter may be split into weeks.

A year may will split into months or quarters.

While this gives information about the timing of receipts and payments, it also shows how the bank and cash balance fluctuates within a period.

This is something that can catch a business out.

Over a month, the bank balance may increase but the cash flow may be U-shaped with the business short of cash mid month. It can also be the other way around if large payments (like salaries) go out at the end of the month.

Cash Reconciliation from the Profit

This format of cash reporting explains how a profit of X creates a cash flow of Y in a period.

I will be writing more about the difference between profit and cash but it is caused by timing differences between the cash impact of transactions, the date of the transactions themselves and their impact on the Profit & Loss Account.

The main format goes something like this:

Operating Profit

Add back Depreciation (a non-cash expense)

Working Capital Movement

= Operating Cash Flow

Capital Expenditure

Corporation Tax Paid

Interest Paid

Loan Repayments

= Net Cash Flow

This answers the question “we made a big profit so why are we short of cash?”

The receipts and payments cash flow can’t do that. All we know is that if cash flow is negative, payments exceed receipts.

Do You Need Both Types Of Cash Flow Reporting?

The receipts and payments report is how you manage your cash flow on a daily or weekly basis and especially if you have a cash flow forecast to use as a comparative.

Every business with any kind of concerns about cash needs to be looking at this information in a receipts and payments format.

If things aren’t going as well as you want, it’s useful to also look at the Cash Reconciliation To Profit report because it highlights where the bottleneck is or where the cash has gone.

If the business doesn’t have a cash issue  because you’re a smaller version of Apple (an extraordinary $145 billion of cash was reported in April 2013), you don’t need to do the traditional type of cash report.

However the Cash Reconciliation To Profit report is useful to avoid any kind of cash complacency. Just because there is plenty of money in the bank, it doesn’t mean you want to let your working capital get out of control.

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