5 Errors on Cash Flow Statements You Should Always Avoid
January 20, 2022
Every business out there practically runs on cash. It’s the lifeblood of any business, no matter how big or small they are, which means you need to manage cash flow responsibly if you want your client's business to thrive. While committing mistakes in your cash flow statement sometimes happen, you should do well to avoid them as much as possible. Otherwise, there's a risk of mismanaging the cash or even derailing the business. To avoid all that, here are some of the common cash flow statement errors that you should avoid at all costs.
1. Misclassifying the Three Cash Flow Categories
One of the most common errors that businesses make in their cash flow statements is misclassifying how cash is actually flowing through their business. This results in a lot of confusion about where the cash is actually going, which can disrupt the actual cash flow of the business. To avoid this, you need to be more meticulous and detail-oriented in your cash flow statement. By observing the three categories of cash flows, then you’ll be able to distinguish between the three and use that knowledge to keep your cash flow in check.
2. Using Cash Balance as a Cash Flow
When you’re making your cash flow statement, you have to make sure that you’re using the cash balance that corresponds with the time period that you’re reporting on. Meaning, when you’re showing your cash flow statement for last week, you should be using the number of the cash balance at the end of the last week, not at the end of the previous month or year. You’re essentially using the wrong number, which makes it impossible to come up with the projected cash balance at the end of the time period.
3. Not Disclosing Non-Cash Transaction
When you’re making your cash flow statement, it’s important that you disclose to the reader all the financial transactions that don’t involve any cash changes. This includes things like depreciation, amortization, and other non-cash transactions. In short, if it doesn’t involve cash under any circumstances, then you should disclose it in your cash flow statement. Otherwise, it gives the impression that you’re leaving out important information.
4. Incorrect Depreciation Rate
Just as you should be disclosing non-cash transactions in your cash flow statement, you should also be using the correct depreciation rate for the depreciation schedule. This is important because it will affect the amount of cash you actually have and allow you to see if your business is going to run out of cash at some point or not.
5. Forgetting to Adjust for the Accounts Payable
If you’re using accrual accounting, you’re going to need to adjust your cash flow statements for your accounts payable. Meaning, there will be times when the money that you’ve received hasn’t been completely received yet, but you still record it as a cash inflow. If you’re not tracking it, you won’t be able to accurately or effectively see where the cash is actually going. This can lead to a lot of unnecessary problems in your cash flow management.
When you’re making your cash flow statement for your business, you want to make sure that you’re doing it correctly. After all, you don’t want to commit some of the more common cash flow errors that businesses make just because you’re in a rush to show your performance. By avoiding these errors, you’ll be setting yourself up for success in your business.
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