Components Of Cash Flow Statement

Published Date: 02 Nov 2017

1.0 Introduction------------------------------------------------------------------2

1.1 Cash Flow-------------------------------------------------------------------2

1.2 Cash Flow For Construction Project----------------------------------3

1.3 Cash Flow Statement-----------------------------------------------------4

1.3.1 Components Cash Flow Statement--------------------------------7

1.4 Discuss Table--------------------------------------------------------------8

1.5 Recommendations-------------------------------------------------------10

1.6 Conclusion-----------------------------------------------------------------11

Introduction:

A contraction company is negotiating on a construction project with 12-month duration. On the last day of each month the construction company may bull the owner for the work complete during the month. The owner pays the monthly bills one month after they are received. For example, the construction company receives payment from work complete September on October 31. The owner also holds 10% retention. Final payment is expected one month after completion of the project and will include payment of retention. The construction company pays the sub-contractors when it receives payment from the owner but withholds 10% from the sub-contractor’s payment. The construction company pays the labor weekly. The projected monthly material, labor and sub-contractor cost as well as the amount the construction company will bill the project’s owner each month.

Cash flow:

The cash flow is usually understood total cash and corporate revival, with the amount of cash for the expenses of the organization. Under normal circumstances, cash journal, tracking cash flow means that real-time record of the transaction. This is considered to accurately reflect the financial stability, are often able to get the information, you can use it to improve the company's economic situation is crucial.

With a particular company or project's general operating cash flow. For example, when a department maintains a discretionary fund petty cash transaction records will be maintained. The idea behind the record of receipts and petty cash payment will help companies recognize when an accidental expense, become a recurrent expenditures, should be added, as the project budget line.

In the case of a special project, such as marketing campaigns, track cash flow is a good idea. Simple record keeping will be conducive to the efforts of enterprises, in order to determine whether the expected level of income generation along the way. At the same time, to monitor how the money is spent, will help to ensure that the project does not go over the amount has been set apart for the purpose.

Cash flow for construction project:

In this part you will learn how to develop a cash-flow projection for a construction project form the perspective of a construction company that is receiving progress payments from the project’s owner. There are two primary threats to a construction company’s financial future. The first threat is lack of profitability. The second threat is insufficient cash. Insufficient cash is where the company lacks sufficient funds to pay the bills that are due. The large potion of a company’s financial assets tied up in the form of cash used to fund construction project. In this chapter we look at the factors of cash needed to construct an individual project.

One of the biggest in determining the cash needs for a project is a schedule of payments from the owner.

Another big factor in determining the cash needs for a construction project is retention. Retention is often held by the owner to ensure that a construction company completes a project. Commonly the retention rate is 5% to 10%.

One of greatest needs for cash on a project comes from labor performed by the company on the project. Normally labor for a project is paid weekly or every two week.

Another needs for cash comes from the used of material on a project. Commonly 15 or 30 credit term.

Additional cash is needed to cover the cost of equipment used to construct the project. When equipment is rented for a short-term basis-daily or weekly the equipment creates a same need for cash as does the materials.

Cash flow statement:

Cash flow is the movement of money into and out of a business or a project and also can define as inflows. Thus, cash flow statement:

To private information regarding a company’s cash receipts and cash payments;

It traces the flow of funds (or working capital) into and out of your business during an accounting period.

Explains the change during the period in cash and cash equivalents.

Cash includes currency on hand and demand deposits;

Cash equivalents are short-term, highly liquid investments that readily convertible to cash;

It summarizes that cash flows so that net cash must be reconciled based on the net effect of these activities is reported. Beginning and ending cash must be reconciled based on the net effect of these activities.

Reports the cash provide and used by the operating, investing and financing activities of a company during an accounting period.

The information contained in the statement is useful to creditors and investors for the following reasons:

To assess the entity’s ability to generate cash flows in the future.

The ability of the entity to pay dividends and meet its obligations.

Reconciliation between net income in the income in the income statement as net cash flow from operating activities in the statement of cash flows.

To assess cash and noncash investing and financing activities of the entity during the accounting period.

Therefore, you will be need to a balance sheet and profit and loss statement (or income statement) for your business for the same time period as the cash flow statement you will be preparing. The three statements work together to give you and others a clear picture of your business.

In addition, a statement of cash flows also provides information useful in evaluating a firm’s financial flexibility. Financial flexibility is a firm’s ability to generate sufficient amounts of cash to respond to unanticipated needs and opportunities. Information about past cash flows, particularly cash flows from operations, helps in assessing financial flexibility. An evaluation of a firm’s ability to survive an unexpected drop in demand, for example, should include a review of its past cash flows from operations. The larger these cash flows, the greater is the firm’s ability to withstand adverse changes in economic conditions. Other financial statements, particularly the balance sheet and its notes, also contain information useful for judging financial flexibility. Some investors and creditors find the statement of cash flows useful in evaluating the quality of a firm’s income. As we know, determining income under accrual accounting procedures requires many accruals, deferrals, allocations, and valuations. These adjustment and measurement procedures introduce more subjectivity into income determination than some financial statement user prefer. These users relate a more objective performance measure, cash flow from operations, to net income. To these users, the higher this ratio is, the higher is the quality of income.

Components of cash flow statement:

Operating activities:

The statement provides information about the cash generated from a company’s daily operating activities. Operating activities are those that produce either revenue or are the direct cost producing a product or service. Below are the examples of operating activities that generate cash inflows and operating activities that create cash outflows.

Investing activities:

Investing activities include buying and selling noncurrent assets that will be used to generate revenues over a long period of time; or buying and selling securities not classified as cash equivalents. Below are the examples of investing activities that generate cash inflows and investing activities that create cash outflows.

Financing activities:

Financing activities include borrowing and repaying money, issuing stock (equity) and paying dividends. It relates to the long-term debt and stockholders’ equity. They include borrowing cash from creditors and repayment of such loans and the sale of capital stock and the payment of dividends and return of capital to equity investors。 For example, if you borrow funds to purchase equipment or pay off a loan, the cash flow statement will enable you to determine how much cash was either generated or used as a result of those transactions.

Discuss about table:

Cash flow calculation:

Total settle

Cash flow using labor because need to pay the wages even the project doesn’t start.

Cumulative labor cost for current and previous. E.g. nov (current) and oct (previous). RF for each month for sub-con payment (assume 10% of total payment for SC)

* Include cumulative RF (starting of cumulative calculation for RF)

* nee to find cumulative RF until the end of payment for SC

* y- ( z + cumulative RF)

* total cash flow before payment need to minus/ deduct CRF for SC

Based on this graph, this company in February after income, February has been engaged in investment project; but the company reached the maximum income gain in October, the company income start last year October continued growth.

1.5 Recommendation:

Increase in prepayments:

While prepayments may seem like a good idea for many businesses, they may do more harm than good. A healthy cash flow must be able to maintain monthly expenses and inventory purchases, but any immediate increases in prepaid expenses reduce cash flow and working capital. Direct costs of the marginal cash flow, the prepayments may mean less cash and income-generating investment

Decrease in payments:

Decrease in prepaid expenses due to increase in cash flow. Operating expenses are usually paid on a monthly basis, which is why any Decrease in prepaid expenses will immediately benefit from the month cash flow.

Accounts payable increase:

As current liabilities Accounts payable, if it is within a year, and as long-term liabilities, the payment if the payment will expire in a year's time. Any current or long-term liabilities of the increase will not affect cash flow, but the purchase of goods or services, because there is no cash payment.

Accounts payable decrease:

Reduction of accounts payable is a decrease in cash flow. It may be tempting to credit, because such transactions do not affect cash flow at the time of purchase of goods and services. However, business owners must keep in mind that subsequent payments will directly reduce the cash flow. Payable improperly, can accumulate and monthly obligations working capital used to generate income suffocation.

1.6 Conclusion:

Managing cash flow is a challenge for most company, especially Constructions Company; there have four forces (taxes, debt, core capital, distributions) at company cash. Find out what they are and how to management it keeps your cash flow healthy.

The problem with cash flow is that it lags behind profit for most business. Unless you costumers pay you and you pay your vendors at exactly the same moment, there will always be a time lag. If you understand the correct order of priority for cash flow, you will avoid the disconnect.