The Cash Flow Statement for Accrual Method Businesses

The cash flow statement is a report that shows the cash generated and used during a specified time period.  The cash flow statement is particularly important for businesses who keep their books using the accrual method.

Cash Flow Statements for Accrual Method Businesses

With the accrual method for keeping books, revenues and expenses are recorded when they are incurred.  This is true even if the cash has not changed hands. The revenues may not have been collected and the expenses may not have been paid.  

The accrual method is required for larger businesses, businesses that carry inventory, and a few others.  This method produces accurate financial statements in terms of the overall health of the business. But it does not result in financial statements that show how much cash went in and out of the business over time.

This means that accrual method businesses cannot rely on the income statement (AKA the profit and loss statement) to provide an accurate picture of how much cash was earned or spent during a set time period.  The cash flow statement is used for this purpose.

Improving the Cash Reported on the Flow Statement

Almost all businesses require cash to keep operating.  In fact, cash shortfalls are the number one reason businesses fail.  As a business owner, efforts to improve the cash reported on the cash flow statement is well worth the effort.  This can include:

  1. Focusing on timely collections of amounts due.  This may include going back and collecting on accounts receivable.
  2. Encourage customers to pay timely.  This may include changing the language on invoices or offering incentives for early payment, such as discounts.  
  3. Sending invoices timely.  This may include sending out invoices earlier in the business cycle or breaking out charges and invoicing for some services earlier.  
  4. Securing pre-payment authorization and information.  This may include structuring your invoicing as recurring payments and/or getting credit card or ACH authorizations at the time of sale.
  5. Pay off or renegotiate interest bearing debts.  This can eliminate interest, which can be a significant expense for many businesses.
  6. Reduce spending.  This may include renegotiating the terms of agreements with your landlord, vendors, employees, contractors, and others.  Rent and insurance are usually two of the highest expenses for businesses, so it may make sense to start with these two expenses.
  7. Find tax savings.  This may include missed tax deductions or credits or even state and local tax incentives that your business may be eligible for.  

Focused effort on these type of activities can go a long way to improving the cash that is reported on the cash flow statement and, in the end, make your business more profitable.  

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