Businesses that are on the stock market or have multiple shareholders may have to follow strict compliance and cash flow reporting requirements. Small business owners who create projections for themselves should not be beholden to these same standards. Still, it’s important to understand the basics of compliance and reporting.
Legal Requirements for Cash Flow Reporting
Private business owners are not required to release their financial statements. If you try to secure financing, you’ll need to meet the potential lender’s requirements, which may require you to provide a cash flow statement.
However, public companies traded on the stock market must meet GAAP requirements.
These accounting principles, which stand for Generally Accepted Accounting Principles, require the release of:
- Income statements
- Balance sheets
- Cash flow statements
Public companies must, as part of their filings, provide a cash flow statement within their:
- Quarterly reports
- Annual reports
If you’re a public company, you’ll work with a large accounting team that will help you manage all of your required documents.
Preparing Accurate Cash Flow Statements
Preparation of cash flow statement data is time-consuming, and you’ll need to collect information relating to:
- Net income
- Non-cash expenses
- Sale of assets
- Cash
- Accounts receivable
- Expenses
You’ll need to provide receipts for expenses or statements to show expenses. Creating a cash flow statement is much easier when you use tools or software that connect to your financial accounts automatically.
Cash Flow Statement vs. Other Financial Statements
Businesses have a lot of financial statements to create and rely on. However, a cash flow statement is slightly different than others. Why?
- Cash flow statements show, over a predefined period, how much cash inflows and outflows exist
- Income statements shed light on a company’s revenue and expenses, including depreciation
- Balance sheets show the total balances of what assets the company owns and also what liabilities exist
Financial statements all serve a unique purpose. Cash flow statements do not paint a clear picture of a business’s operations in the same way that many other financial statements can. Often, lenders and shareholders will look to the balance sheet first to learn about assets, liabilities and shareholder equity before glancing over the cash flow statement.
Ensuring Transparency in Cash Flow Reporting
Transparency is the foundation of cash flow reporting. Financial reports should provide stakeholders with accurate information about a company’s:
- Financial health
- Performance
- Operations
- Future plans
Using the most up-to-date and accurate figures to create cash flow reports will help ensure transparency now and in the future.
Reports should be shared with employees, C-suite and investors so that everyone is on the same page.
Common Cash Flow Reporting Mistakes to Avoid
Cash flow reports provide stakeholders with insightful data on the organization’s financial health. Errors or mistakes in reports can cause stakeholders to lose confidence and make your data less reliable overall.
When creating cash flow reports, it’s important to avoid making these common mistakes:
Misclassifications
Cash flow statements are broken down into three primary categories: operating, investing and financing activities. Misclassification is a common error, and it’s one that’s important to avoid.
Having a deeper understanding of each category will help you avoid classification errors in the future.
- Operating activities are those related to your income statement and changes in your current liabilities and assets.
- Investing activities are those related to long-term assets.
- Financing activities are those related to changes in long-term equity or liabilities
Failure to Disclose Non-Cash Transactions
Cash flow reports should also include non-cash transactions. It is common practice to make a note of these transactions in narrative form at the bottom of the cash flow statement. If you have complex or multiple non-cash transactions, it may be more practical to create a separate footnote.
Overlooking Taxes and Interest
When businesses use the indirect reporting method, they often overlook the amount of income taxes and interest paid. Both are commonly excluded from reports, and even when they are, they are often improperly reported.
It’s important to ensure that income tax and interest payments are properly reported.
In Conclusion
Every business should create cash flow statements and reports, even if not legally required to do so. For public companies, the preparation of cash flow statement is mandatory. Following the best practices for statement preparation and avoiding common mistakes will help you remain in compliance and produce more reliable, accurate cash flow statements.
