Your cash flow statement provides data about all the money inflows your company receives from operations and is a fundamental part of the financial statements.
Alongside your balance sheets and income statements, it is vital for managing your small business accounting. It keeps you abreast of how much cash is entering or leaving your business in any given period, ensuring you have enough money to keep operating.
These statements deliver accuracy, as they track the cash made by the business in three main ways – through operations, investment, and financing.
To understand your organisations’ financial health, you must ensure the fundamental elements of your cash flow statement are handled accurately. The Financial Reporting Council (FRC) report many errors they found in cash flow statements and have listed it as third on the list of most frequently raised areas in their 2020-21 Corporate Reporting Review.
Transparency and integrity
The FRC, which regulates auditors, accountants and actuaries, and promotes transparency and integrity in business, found cash flow statements with items incorrectly classified.
In the 2020-21 Corporate Reporting review, they state, “We continue to be concerned about the number of queries we raise concerning compliance with the requirements of IAS 7 ‘Statement of Cash Flows’.
As in prior years, many of the cash flow statement errors described in sections 3.1.3 and 6.3 were identified through critically analysing the line items appearing on the face of the statement. Companies should focus on cash flow statements as part of their pre-issuance reviews.”
Management must avoid errors by providing sufficient time and resources to prepare and review cash flow statements. Emphasis must be placed on people taking personal responsibility for the stewardship of cash flow.
Business leaders should take responsibility for cash management if there is a risk of business failure and avoid errors when reporting.
Guidelines should be followed, such as:
- Regular communication with those in charge of cash movements
- Strict controls over cash flow reporting
- Make sure responsibilities, reporting lines and staff cover for all cash-related matters are clearly understood
- Enhancing forecasting effectiveness to get a clearer idea of cash flow in real-time
- Preparing easy to understand cash flow reports to support critical business decisions and funding
- Increasing frequency of reporting
- Preserving underlying data in as much detail as possible.
The principles outlined should apply to all sizes or types of business.
