They rely primarily on cash flow statements and the expertise of accountants to make informed strategic business decisions. So the cash flow statement must be accurate.

The cash flow statement is one of the three basic financial statements used alongside the income statement and balance sheet. However, the cash flow statement is the most important because it summarizes the amount of money entering and leaving an organization. 

Accounting professionals must have the right tools and resources to not only avoid cash flow errors but also help maximize cash flow for clients.

So what are the common errors in the cash flow statement, and how can you help your clients improve cash flow management? 

What’s in the Cash Flow Statement? 

The cash flow statement shows the actual cash flows of a business, which makes it particularly useful in determining the short-term viability of a business. This is different from the income statement, which shows accrued income and expenses based on GAAP accounting. In addition, the cash flow statement does not include non-cash items such as depreciation.

What are the main types of cash flows?

The statement of cash flows is divided into three.

• cash flow from operating activities
• cash flow from investing activities 
• cash flow from financing activities

Cash flow statements give business owners and investors a better understanding of how the business generates cash and meets its financial obligations. 

Cash flow from business activities:

Many publicly traded companies will present this section adjusting net income to deduct non-cash operations, such as depreciation, amortization, and adjustments to accounts payable and receivable, among others. Other items.

Cash from investment activities:

Anything classified on the balance sheet as a long-lived asset can be an investment. This section represents money used to purchase goods, plants, equipment, and other productive assets. It can also represent cash used to invest in property, as well as proceeds from the sale of equipment or other long-lived assets.

Money brought in by financial activities:

This part is the cash received or paid from borrowing and issuing capital, such as money raised in a debt offering or loan proceeds. It may also include dividends paid.

The net cash from these three parts is then added together to determine the net increase or decrease in cash for the period.

To illustrate this point, consider the following example from Harvard Business School:

Your customer started the year with about $10.75 billion in cash and cash equivalents.

In the cash flow statement, cash flows are divided into cash flows from operating activities, investing activities, and financing activities. Customers brought in $53.66 billion from their regular operations. During that time, they spent approximately $33.77 billion on investing activities and another $16.3 billion on financing activities, for a total cash outflow of $50.1 billion.

Result:

Customers ended the year with a positive cash flow of $3.5 billion and a total cash flow of $14.26 billion.  

COMMON CASH FLOW PROBLEMS

When analyzing a company’s cash flow statement, several common cash flow problems can arise.

• Expense:

If a business spends too much money each month to cover expenses or is suddenly faced with a large expense (i.e., equipment needs to be repaired), it can quickly become a flow problem. To help avoid a cash flow crisis, business owners need an effective plan to track monthly expenses and forecast future expenses for the coming months.

• Bypass recurring charges:

Ignore recurring and seemingly insignificant fees that can quickly add up and lead to problems if addressed. For example, track subscriptions to online services that automatically lower monthly fees. Also, keep track of cash expenditures, like buying bagels for the team on the way to the office.

• No projection plane:

Every business should maintain a six-month forecast with projected revenue and expenses and adjust for seasonal peaks and troughs.

• Unclear payment terms:

To help avoid delays in accounts receivable, businesses should establish consistent policies and procedures to ensure their customers pay on time. This means clarifying payment terms and expectations on each invoice, such as “payment due on receipt” or “payment due within 30 days”.

• No collection plan:

When a late customer becomes a delinquent customer, your business should have a standard collection plan to collect outstanding invoices. This involves setting invoice deadlines and keeping track of unpaid bills. If a customer has a significant delay in bill payments, such as several months late, businesses should consider using a third-party collection agency or collection service.

How do you find errors in the cash flow statement?

When preparing a cash flow statement, some common mistakes can happen. Knowing what to look for can help identify errors in the cash flow statement. These include the following:

• Misclassification:

As mentioned earlier, the cash flow statement is divided into three categories:

Operating, investing or financing activities. Misclassifying cash flow is a common mistake. There are a few tips to keep in mind when identifying incorrect classifications:

1. Investment activities generally involve changes in long-term assets.
2. Financing activities often involve changes in long-term debt and/or equity.
3. Operating activities generally involve income statements and changes in short-term assets and liabilities.  

• Non-monetary transactions:

Non-monetary transactions are often ignored and incorrectly included in the cash flow statement as if money were changing hands. For example, when buying a new car by issuing an invoice, one tends to show the total purchase price and the entire balance of the new invoice in the areas of investment and finance, respectively. However, in reality, no money changes hands. It is simply the signature on a piece of paper.

• Non-Cash Transactions Ignored:

Non-disclosure of cashless transactions needs to be fixed. The presentation may vary, whether as a narrative at the end of a statement of cash flows or as a table. If there are many complex and/or complex non-monetary transactions, a separate footnote can be helpful.

• Interest and taxes:

Interest and tax payable amounts are often omitted when using the indirect cash flow statement presentation method. It is common not only to omit these disclosures but to report them inappropriately, even when they are included. 

Note that the adjusted balance must be adjusted to the cash basis for proper reporting. What to do in case of problems

As trusted advisors, accountants are ideal for helping clients find solutions to problems. 

Here are some ways to help:

• Review and, if necessary, adjust the price of the company’s products or services.
• Review the company’s client contracts and, if possible, ask them to renegotiate existing contracts for more favorable payment terms so they can get paid faster.
• Reassess their accounts payable and, if necessary, encourage customers to negotiate payment terms with suppliers.
• Review customer receivables process. If needed, help them standardize the payment process, create a protocol for sending service invoices at the same time, and send invoices using the same method (e.g. email, etc.).
• Reassess their expenses. 

Are there any costs and expenses that can be eliminated or reduced?

How to improve cash management

To help clients take preventive action, there are some red flags that accountants should be aware of.

To get started, track negative cash flow or negative cash flow from operating activities. This could indicate that the company is relying on financing or selling assets to fund its operations, which is not a sustainable long-term position.

Another red flag to watch out for is an operating cash flow ratio (operating cash flow to current debt) below 1.0. This could mean that the business is not generating enough cash to pay its bills.

Note significant changes in cash flows from period to period and how they compare to changes in the income statement. Net profit remains steady, but operating cash flow is down. If so, it could be a harbinger of trouble to come. Accounting professionals can avoid cash flow statement errors by automating the process with a powerful accounting solution like Payroll CS Accounting, which has powerful cash management features to help optimize customer cash flow.