Understand Cash Flow Statement and Find Your Way Through Construction Finances
- Cost Construction Accounting
- Jun 14, 2023
- 4 min read
Updated: Oct 10
Are you wondering how much cash flows in and out of your construction business? The cash flow statement is your essential financial tool to understand this movement. In this comprehensive and easy-to-understand article, we will explore the cash flow statement, its importance, and how it can empower you to take control of your company's financial health.
Table of Contents:
What is a Cash Flow Statement?
A cash flow statement focuses on actual cash inflows and outflows during an accounting period, unlike the balance sheet or income statement. It provides a clear view of your business's cash position by showing how much cash and cash equivalents your construction company generates and spends. This important financial statement covers your business operations, investing activities, and financing activities, giving you a detailed picture of your company’s financial standing.
Why is Cash Flow Statement Important?
The cash flow statement offers critical insights into your company’s financial health:
Tracking Cash Movement: It reveals how cash moves through your business, showing cash inflows from sales revenue and cash outflows such as operating expenses, loan repayments, and income tax payments.
Impact of Decisions on Cash Flow: It highlights how your business operations, investment activities, and financing activities affect your cash balance, helping you anticipate cash flow issues or opportunities for future growth.
Assessing Cash Position: Understanding your net cash flow helps you manage excess cash or address negative cash flow means, ensuring your business maintains a healthy cash reserve.
In short, the cash flow statement focuses on generating cash and managing cash flow from operations to maintain a sustainable and profitable business.
How to Analyze the Cash Flow Statement
The cash flow statement breaks down cash flow from three key areas:
Operating Activities
This section shows cash flow from your core business operations, how much cash your construction company generates or uses daily. Positive operating cash flow indicates your business generates more cash than it spends on business operations, including:
Cash receipts from customers for completed projects
Payments to suppliers for materials and equipment
Salary and wage payments to construction workers
Operating expenses such as rent, utilities, insurance, and income tax payments
Investing Activities
Investing activities reflect cash flow related to capital expenditures and investment decisions. This section helps you assess your company’s investment activities and their impact on cash flow, such as:
Cash used to purchase heavy machinery and equipment
Cash invested in land or property acquisitions for future growth
Proceeds from the sale of unused equipment or assets
Investments in research and development or other long-term assets
Financing Activities
Financing activities cover cash flow from equity financing, borrowing money, and loan repayments. This section provides insights into your company’s capital fundraising efforts and debt management, including:
Cash received from bank loans or bond issuances for project financing
Cash paid for loan repayments, interest, or dividend payments to shareholders
Cash flow from financing activities that affect your company’s cash reserves and financial performance
"How do I prepare a cash flow statement?"
Direct vs. Indirect Cash Flow Method
When preparing a cash flow statement, you can use one of two methods to calculate cash flow from operations:
Direct Method
The direct method lists all cash receipts and cash payments during the accounting period, such as cash collected from customers and cash paid for accounts payable, salaries, and other operating expenses. This method provides a straightforward view of cash flow from your business operations.
Indirect Method
The indirect method starts with your company’s net income and adjusts for non-cash items and changes in working capital, including accounts receivable and accounts payable. This method reconciles net income with net cash flow from operating activities, providing insights into cash flow issues that might not be apparent from the income statement alone.
By choosing either the direct or indirect method, you can create a cash flow statement that shows the money coming in and going out of your business.
The Power of a Cash Flow Statement Example
Creating a cash flow statement from scratch can be complex. Luckily, there are cash flow statement templates available to simplify the process. Let's look at an example of a cash flow statement from a made-up construction company that the CFMA has given us:
This example shows the breakdown of cash inflows and outflows. It provides a snapshot of how cash flows through the company, allowing you to spot trends and make informed decisions.
How Can CCA Simplify Your Cash Flow Management?
At Construction Cost Accounting (CCA), we help small business owners and construction companies streamline their financial reporting and cash flow analysis. Our expert team assists with preparing accurate cash flow statements and provides tailored solutions to optimize your cash flow management.
With CCA, you can:
Gain peace of mind with optimized financial processes
Access expert guidance in cash flow statement reading and interpretation
Make strategic financial decisions based on your company’s cash flow and financial performance
In Conclusion
Understanding and analyzing your cash flow statement is vital for managing your construction business’s financial health. By focusing on operating activities, investing activities, and financing activities, you can gain a comprehensive view of how cash moves through your company. This knowledge helps you identify positive cash flow opportunities, address negative operating cash flow, and plan for sustainable future growth.
At Construction Cost Accounting (CCA), our team specializes in construction bookkeeping and financial reporting. Contact us today to learn how we can support your business’s financial success and help you master your cash flow statement.
