A cashflow statement simply shows all the receipts to, and payments by, the business. Cashflow statements for historical periods usually show what happened for a year, though as with other statements, they can be prepared for any period. The cashflow statement shows how money flowed into and out of the business during the period and relates the P&L (profit and loss) account to the balance sheet. In particular, it shows by how much the working capital in the business increased or decreased and highlights the reasons for the changes. It does not show the amount of working capital available - that is on the balance sheet. Remember that a cashflow statement only shows cash in and cash out, so non-cash items such as depreciation are ignored.
It sometimes seems odd to people who aren't accountants that a business can be profitable and yet be short of money or running an overdraft. It must be remembered that profit and cash are not the same. Remember that the P&L matches revenues and expenses for a specific period, though revenues accrued for that period may not all have been received nor all expenses paid. If, for example a business receives £5,000 cash in respect of sales and has to pay out £6,000 in expenses, then it will have to borrow £1,000 from the bank (or the owners), even though the level of sales may, in reality, be far higher.
Below is a typical example taken from Young & Co's Brewery.
It may not be immediately obvious how some of the figures in the cashflow statement have been derived, so the annual accounts will usually also have some notes to explain and reconcile the figures. As can be seen, Young & Co’s working capital has increased by £1.3m. Cash has improved by £1.4m and the stock position by £1m, but the debtors’ position has deteriorated by £0.5m.
Cashflow statements can be used to monitor competitors. For example, if firms are spending more on capital equipment than their depreciation charge suggests, they may be expanding. If their working capital has increased it may simply be because of inflation, or poor control of stocks or debtors, or might point to expansion. If working capital decreases, it might be because of a contraction in business, a trading loss, or because control of stock and debtors has improved. If working capital has decreased, it may to lead to problems of liquidity.
Cashflows are particularly helpful to businesses, however, when they are used as forecasts. They can then be used to summarise targets and to monitor performance.