What is the Income Statement?The Income Statement, or IS, is an accounting statement normally prepared annually that presents companies’ financial and operational results.It is through the Income Statement that managers assess whether the business operated at a profit or a loss. But for the report to be accurate, it is necessary to compile all revenue, cost, and expense data according to the accrual accounting basis.Thus, a good analysis of the Income Statement provides an understanding of the company’s entire economic situation, while also offering a guide with profitability indicators.What is the cash flow report?The cash flow report, which can also be called the Cash Flow Statement, exists in two forms: the first is actual cash flow and the second is projected cash flow.Actual cash flow is the real-time tracking of the financial inflows and outflows for that month for business reporting and management purposes. In very brief terms, it is a routine task for data collection.Projected cash flow, on the other hand, is a tool that enables a future projection of a company’s cash inflows and outflows based on previous data collected by the company in recent fiscal years.In financial planning, this is important because it allows managers to anticipate the business’s financial needs and make sound decisions about investments, financing, and other activities that affect and may compromise the company’s financial health.Projected cash flow is normally prepared with a specific company period in mind (two-month period, quarter, semester, or year).It uses the company’s sales, cost, operating expense, and investment estimates to generate data for management, but it can also consider predictable external factors, such as market changes, government regulations, exchange-rate flows, seasonality, product supply problems, and more.Both are important for the financial management of any business. The cash flow report should be both Actual, to ensure tax and accounting compliance (in addition to collecting data for estimates), and Projected, to provide management with enough information for business decisions: amounts available for investment, working capital, etc.Decisions about where to cut costs and how to increase profits often come from analyses of cash flow reports.History of Cash FlowThe Cash Flow Statement (CFS) became mandatory in Brazil, as of Law No. 11,638/07, for all corporations and other companies considered large. According to technical pronouncement CPC 03, item 11, “the statement of cash flows must present cash flows for the period classified by operating, investing, and financing activities.”Although it has only been mandatory since the 2008 fiscal year, empirical studies show that the Statement of Cash Flows had been published voluntarily by numerous companies in fiscal years prior to the application of the Law, as it presented investors with relevant information about the company’s financial health.On the subject, the study by Salotti and Yamamoto (2008) stands out, investigating the reasons for the voluntary disclosure of this statement (CFS) by publicly traded companies listed on BOVESPA. The study found, among other aspects, that publicly traded companies with shares listed on BOVESPA voluntarily disclosed the CFS mainly because: they give greater importance to the perceptions of their outsiders; they have lower disclosure costs; and also because disclosure causes a decrease in the level of information asymmetry.How to prepare the CFS?In simple steps, cash flow can be prepared as follows:- Choose the period for preparing it (quarterly, annually, etc.)- Estimate the company’s revenues for the period: sales, investments, loans, donations received, whatever applies.- Estimate costs and expenses for the selected period: hiring, materials, raw materials, marketing, rent, suppliers, replacements, purchases, installments, etc.- Calculate the difference between revenue and costs and expenses. Projected operating cash flow = Revenue - (Costs + Expenses)- Assess which external factors may affect cash flow: market fluctuations, seasonality, interest rates, tax changes, shortage of labor or products, etc.- Calculate the projected cash balance as follows: Opening Balance + Projected Operating Cash Flow - (Debts + Dividends + Expected Cash Outflows)- Update projections with real data to ensure more accurate and efficient metrics for your management.What is the difference between the Income Statement and the CFS?The main difference between the two, the Income Statement (Statement of Income for the Period) and the CFS (Cash Flow Statement), is the company’s recording method and the basis used.The Income Statement records the event on the date the triggering event occurred (the document date), regardless of when it will be paid or received - it shows the company’s profit or loss in a given period because it is based on the accrual basis.Difference between Income Statement and CFSOn the other hand, the CFS uses the cash basis, showing the company’s cash inflows and outflows on the date of payment or receipt - when the amount is actually moved.Which is more important: Cash Flow or Income Statement?The two have different objectives and are important, but cash flow has a direct impact on your company’s production. Even if profit margins are excellent, the company cannot operate if it has not known how to plan its cash flow well. We need to have a minimum amount of cash on hand to buy what is necessary for your inventory in order to continue making sales. Therefore, I can state that Cash Flow is extremely important, more so than the Income Statement, because if it is poorly done, you will run out of working capital to operate, suffocating your company.What will we see from now on with Cash Flow?I intend to use these classes so that we can learn how to read the Cash Flow Statement in companies’ earnings reports. Taesa, a company in the electric sector, for example, publishes its report here, and I would like each student to be able to read and interpret what is happening in the company.
Inicia sesión y únete a la conversación
— Comentarios 0
, Reacciones 1
Se el primero en comentar